How to Make the Most of Your Charitable Contributions
4 Ways to Maximize Your Charitable Contributions
Charitable giving is an altruistic opportunity to help others and receive a tax deduction. Here’s how you can maximize both impacts.
You can approach charitable giving in many ways. Perhaps it’s a monthly obligation, one of your regular budget categories, or an annual tradition. No matter when you give, a strategic approach can help ensure your money will be put to good use, and you’ll receive as large of a tax deduction as possible.
The Tax Deduction Basics
Before jumping into strategy, it’s important to understand when and which donations could be tax-deductible. Even if you’ve learned the basics before, it’s worth brushing up on the rules. The 2018 Tax Cuts and Jobs Act also made a few significant changes that could continue to impact your plans.
First, know that charitable contributions are itemized deductions and you won’t receive a tax benefit unless the sum of your itemized deductions is greater than your standard deduction.
There are limits on certain types of itemized deductions, such as a $10,000 cap on the combined deduction from state, local, and property taxes. Other deductions, such as the one for unreimbursed work expenses, were completely eliminated in 2018.
The standard deduction also increased. For the 2019 tax year, it’s:
- $24,400 if you’re married and file jointly
- $12,200 if your filing status is single or married filing separately
- $18,350 if you file as head of household.
If you or your spouse are 65 or older, your standard deduction increases by $1,300. If you both qualify, it increases by $2,600. If you’re 65 or older and unmarried, you may receive an additional $1,650.
There are a few more rules to keep in mind:
- Your gift is only deductible if you’re giving to a tax-exempt organization, such as a 501(c)(3) nonprofit. You can use the IRS’s tax-exempt organization search tool to see if your desired recipient qualifies.
- If you receive something in exchange for your contribution, such as a T-shirt or event ticket, you must subtract its value from your contribution to determine your deductible amount.
- For cash contributions, you generally can deduct up to 60% (rather than the previous 50%) of your adjusted gross income (AGI) for the year. There are lower 20% or 30% of AGI limits if you donate noncash assets, such as investments and physical goods (i.e., a car or old furniture). You can carry over excess deductions for five years.
With these basics in mind, here are four strategies you can use to maximize the impact of your charitable giving:
1. Research Charitable Organizations Before Giving
You may have several charities you know well and want to continue supporting, and there may be a few causes that are particularly meaningful to you.
If you’re looking to make as big of an impact as possible, research the charities before giving to make sure they’re using their money wisely. You may find that the big-name nonprofits aren’t necessarily the most effective change-makers.
Charity Navigator, Charity Watch, and the BBB Wise Giving Alliance can help you do your due diligence and provide easy-to-understand ratings of nonprofits. You can search by specific charity, or look through different keywords and topic areas to discover lesser-known organizations that could use your help.
2. Gift Appreciated Assets Instead of Cash
Donating long-term appreciated assets (meaning you’ve held the investment for at least a year) can be an especially efficient way to support a good cause. These can include stocks, bonds, mutual funds, and other types of investment products.
It’s a good strategy because you can deduct the investment’s current value, but you don’t need to sell it first and therefore avoid paying taxes on your gains. Additionally, the charity won’t pay taxes on the investment’s gains—making this an easy win-win.
Similarly, if you’ve started taking required minimum distributions, you could make qualified charitable distributions (QCDs) from your account instead. The QCD isn’t tax-deductible, but there’s still a benefit because you won’t have to pay income or capital gains taxes on the distribution.
3. Bunch Your Donations
With the changes to itemized and standard deductions, you may find that your charitable contributions don’t offer as big of a tax deduction as they once did. The bunching strategy—making several years’ worth of contributions at once—could help.
For example, if you’re married and file jointly (and both under 65 years old), your standard deduction will be $24,400 for the 2019 tax year. If you have $22,000 in itemized deductions, including $10,000 in charitable donations, there’s no tax benefit to giving this year. Even if you give more, you’ll only see a marginal benefit as you push past the $24,400 standard deduction line.
However, you could take the standard deduction this year and make the $10,000 donations at the start of next year. Bunch this with your 2020 donations, and you’ll have $20,000 in tax-deductible charitable donations next year. Add the additional $12,000 from your other itemized deductions, and you’ll now be at $32,000, which is much higher than the standard deduction.
4. Start a Donor-Advised Fund
Another popular option is to open a donor-advised fund (DAF), which is a special investment account for donations. You can receive a tax deduction during the year you make contributions to the DAF, the money can grow tax-free within the account, and you can then distribute the money to charities over time.
A DAF could be a good match if you’re using the bunching approach but prefer to spread out the donations. Maybe you want to evaluate how effectively a new charity uses the money and become a sustaining supporter rather than handing over a lump sum.
A DAF can also be helpful if you receive a windfall gain, perhaps from selling a business or a large severance package. You may want to take a large charitable tax deduction during the high-income year, but aren’t prepared to give away all the money yet.
Additionally, if you’re looking for ways to pass on the importance of charitable giving, a DAF can support this goal. You can establish and fund the DAF while planning your estate, and know that you’ll pass on money that’s earmarked for charity.
You Work Hard for Your Money—Make It Work Hard Too
It can take time to figure out how to maximize charitable donations, but it’s time well spent. After you’ve done the upfront research, you can be certain that when you give your money away the charitable organization knows how to effectively put the money to work.
Additionally, you’ll have made wise financial choices that minimize your taxes. You can then use the money you save to increase your gift, make the cash-crunched holidays a little easier, or put the money back into a different part of your budget.