Charitable giving provides both good and tax savings. Here are some strategies to help maximize both:
Donate appreciated assets - Contributing long-term appreciated securities, such as stocks, mutual funds, bonds, real estate, or private company stock, can be a highly tax-efficient method of giving. For example, by donating stock that has appreciated for more than a year, you effectively give 20 percent more than if you sold the stock and made a cash donation.
Donor-advised funds (DAFs) - A DAF is a charitable investment account exclusively created to support philanthropic organizations you care about. This could offer an immediate tax deduction upon deposit of your contribution. The funds can be further invested for tax-free growth and later distributed to any IRS-qualified public charity.
Early contributions - Consider front-loading your charitable giving by making large contributions during your high-income earning years (big bonuses or sales of investments). By contributing to a donor-advised fund during your high-earning years, you will not only reap extra tax benefits when you need them most but also prepare for charitable donations during your retirement, when your income is likely to be reduced.
Qualified Charitable Distributions (QCDs) - If you are 70½ years or older, up to $100,000 from your traditional IRA can be directed to qualifying charities tax-free as QCDs in 2023. This tax-free withdrawal is exclusive of your other IRA distributions and is beneficial whether you take the standard deduction or itemized deductions.
While it’s important to consider different strategies for charitable giving, I also wanted to share some best practices to know when starting your giving journey:
Donate to IRS-acknowledged charities - To claim a deduction for charitable donations, your contribution should be made to an IRS-recognized charity, and you must receive nothing in return for your gift.
Know deduction limits - Although you can generally deduct up to 60% of your adjusted gross income through charitable donations, some limitations may apply depending on the type of contribution and the organization.
Tax-smart investments - It’s always important to evaluate all potential donations to identify the most tax-efficient and high-impact contributions available. To do this, I recommend first seeking expert tax and financial counsel to help you identify non-cash assets you own that may have appreciated, as well as to assess any potential tax liability you may face if you were to sell these assets.
Document your contributions - Always ensure you document all charitable contributions to itemize them on your tax return. To do this, make sure you maintain copies of your W-2 or pay stubs showing the amount and date of your donation if the contribution is an automatic deduction from your paycheck.
Know the deduction deadline - Your donation must be made by the end of the corresponding tax year to be considered tax-deductible. For example, any charitable contributions you’d like to add to your 2023 tax returns must be made before January 1, 2024.
The above charitable giving strategies are just a few of the ways you can make a difference, while also taking control of your financial well-being.