As we head into the final months of 2024, many people feel inspired to give back to their communities and support causes they care about. While the holiday spirit is often the driving factor behind this generosity, strategic charitable giving can also provide significant financial benefits, helping you reduce your tax burden while maximizing the impact of your donations.
This guide will help you navigate some of the most effective charitable giving strategies to ensure that your generosity goes further for both your chosen causes and your financial well-being.
What Should You Donate?
Donating Appreciated Assets vs. Cash
One of the most common ways to give is by donating long-term appreciated assets like stocks or mutual funds. This approach can be far more tax-efficient than selling the shares and donating the cash proceeds. When you donate shares directly, you may be able to avoid paying capital gains taxes on the appreciation, and you can deduct the full fair market value of the asset on your tax return.
For example, if you sell $10,000 worth of stock that you originally purchased for $5,000, you would incur capital gains taxes on the $5,000 profit, increasing your overall income tax liability. In contrast, if you donate the shares directly to a qualified charity, you avoid paying those capital gains taxes and can still claim a $10,000 charitable deduction on your income tax return.ย
Donating appreciated assets can be an excellent way to reduce your tax liability and ensure more of your money goes where you want it โ directly to the charitable causes you support.ย
How Should You Donate?
Direct Donations vs. Donor-Advised Funds
For direct donations, you need to contact your charity of choice and ask for their instructions on how to donate securities. Most large charitable organizations have brokerage accounts through which they accept contributions. Once transferred, youโll receive a receipt indicating the fair market value of the donated shares, which you can use for tax purposes.
If you plan to give over several years, or youโre undecided on which charities you want to support right away, a DAF can offer greater flexibility. With a DAF, you can add proceeds to the fund, take an immediate tax deduction, and then direct donations to charities over time. Other benefits of a DAF include simplified record-keeping, since all your donations are consolidated in one place, and the ability to grow the funds tax-free before disbursing them to your chosen causes.
Qualified Charitable Distributions
For IRA owners over the age of 70 ยฝ, a Qualified Charitable Distribution (QCD) offers a tax-efficient way to donate by allowing you to transfer up to $100,000 directly from your IRA to a charity. The key benefit is that the amount counts toward your Required Minimum Distribution (RMD) but is excluded from your taxable income, which can help lower your overall tax bill and potentially keep you in a lower tax bracket.
Unlike most charitable donations, which must be itemized to qualify as a deduction, QCDs offer a distinct advantage. Many retired married couples filing jointly may not be able to exceed the high 2024 standard deduction amount. However, because QCDs donโt need to be itemized, retirees can take the standard deduction and still receive a tax break. For example, if your RMD is $30,000 and you make a QCD of $10,000, youโd only owe income taxes on the remaining $20,000. This makes QCDs an appealing option for retirees who donโt have enough deductions to itemize but still want to reduce their tax burden and support charitable causes.
When Should You Donate?
Timing Your Contributions
Timing your charitable contributions can also play a significant role in maximizing your tax benefits. Making donations before the end of the year is essential for claiming a deduction for that tax year, but you can also strategically plan your giving around high-income years.ย
If you expect to be in a lower tax bracket in the future, it might make sense to front-load your donations in higher-income years when the tax savings will be greater. Additionally, if you have appreciated assets, donating them in a year when their value has significantly increased could maximize your deduction.
Bunching Contributions
Another strategy is โbunchingโ charitable donations using a DAF. This involves consolidating several yearsโ contributions into a single year to exceed the standard deduction threshold and potentially receive even more substantial tax benefits.ย
Make the Most of Your Giving
As the year comes to a close, itโs the perfect time to review your financial and charitable giving strategies. The Ironwood Wealth Management team is here to help you make the most of your generosity and ensure you have a tax-smart financial plan in place. Contact us today to get started.ย
