Charitable Giving Basics

With the end of year coming quickly, I wanted to cover the common questions we get about on charitable giving while there is still time to squeeze some giving in. The topic of charitable giving is wide ranging, stretching from basic Goodwill donations to multi-million-dollar gifts of stocks, real estate or even entire companies. I’ll start with the basics and discuss more advanced strategies in this article.

Giving to Causes You Care About

It is true that donating to your local food shelf, animal shelter, or even Scouting can provide tax benefits. However, it is important to start with two primary questions:

• Why am I giving in the first place? 
• Do I want to give even if there is no tax benefit?

We have received numerous inquiries about what the optimal amount of charitable giving is each year to reduce taxes. Many times when asked if there were plans to give to charity now or in future, it hasn’t been considered. If the only focus is on reducing your tax liability, consider other avenues. There isn’t a practical way to donate money and have tax savings make you whole. In other words – does it make sense to give $1 solely for the 40 pennies that might get deducted from your tax return? We don’t think so.

In summary, prioritize the desire to give over tax savings. If you do decide to give – find your purpose for doing so.

Tax Considerations for Charitable Giving

Now that we have our motivations in good order, let’s consider the tax savings benefits as icing on your giving cake.

How does this work? 

It used to be much simpler. You would give a little bit of cash to charities here and there, donate items left over from a garage sale, and maybe a little extra to the church building campaign. Then, presto – instant tax deductions. Well, that is no longer the case. The Tax Cuts and Jobs Act in 2017 significantly increased the standard deduction amount that everyone can elect when filing taxes. In addition, changes in mortgage interest deductions meant that many people are using the standard deduction election over itemizing their deductions. Now that old couch plus a few cash donations won’t help your tax bill any more than claiming the standard deduction.

Standard Deduction

The standard deduction in 2024 for married filing jointly is $29,200, or $33,100 for couples over the age of 65. The practical implication is that to get a tax benefit from charitable giving, you need to gift a large amount. Along with other itemized deductions, that amount should add up to significantly more than the standard deduction. 

So, how do you go about donating and getting a tax break? First, let’s discuss a concept called “bunching”.  Simply put, you take the donations you intend to give over the next several years and group them together into a single year. This can create a larger deduction in that year by driving your itemized deductions above the standard deduction limit. In turn, providing a larger total deduction than if the donations were split over multiple years as planned.  You may be thinking “Well, I don’t want to give $50,000 to my local animal shelter all at once”. This is where Donor-Advised Funds can come in handy. For now, just understand that you’ll either need to make a single donation that is large enough or bunch several planned donations into one year to compete with the standard deduction. However, there are limitations to keep in mind.

While you can give as much as you want to in any one year, you might not be able to utilize the full deduction if you exceed a percentage of your income. Generally, this amount is up to 60% of income for cash gifts and 30% of income for donations of appreciated assets. This may not be an issue if you had a high-income year, like an equity compensation event for example. However, it could be an issue if you are retired and purposely trying to keep taxable income low.

Charitable Giving Methods

What can I give? Of course there is always good old-fashioned cash. Cash is easy to understand and facilitate.

However, a better method is using low-basis investment holdings. I’m referring to the few shares of Nvidia stock you purchased back in 2015 because you liked how they worked with your Gaming PC. Now the company is fueling the Artificial Intelligence revolution, and you are sitting on a giant profit that the IRS will eventually want to talk to you about. That wasn’t you? Ok, for this example imagine it was. The good news is you can gift shares of stock instead of cash. The reason this works so well is that you will not need to sell your shares or pay any taxes to do it. Instead, you give your charity the chosen number of shares. Then you claim the full value as a deduction. Meanwhile, the charity sells the shares and does not pay taxes on the gain.

This also works with Exchange Traded Fund or Mutual Fund shares and stocks you receive from an equity compensation plan. Just be sure to hold the shares for longer than a year so that they qualify for long-term capital gains. Otherwise, the added benefit of this method is lost.

Qualified Charitable Distributions (QCDs)

There is arguably an even better method of giving for those over age 70.5 who have an IRA. This method allows you to give directly from your qualified tax account and bypass any taxes paid. This is referred to as, wait for it… a Qualified Charitable Distribution (QCD). Clever name and easy to execute. The main benefit is that gifts sent directly from your IRA to charity do not need count as income on your tax return. Think back to the standard and itemized deduction discussion. Now that smaller $10K gift you want to make that doesn’t get you over the itemized deduction hurdle can still be beneficial.  Additionally, for those over age 73 with an IRA, Required Minimum Distributions (RMDs) must be withdrawn each year.  Giving with this QCD method reduces the amount of your remaining RMD, and therefore reduces the amount subject to income tax.

Conclusion

For your charitable giving this year, first consider why you are giving. Once you are clear on your purpose, think about how much and how often you’ll be sending money to your favorite charitable organizations. This will help you decide if bunching your giving together is a good approach. Further, what you give also matters. Although gifting cash is easy, you may want to consider stocks you’ve owned for more than one year that have gains. Better yet, if you are over 70.5, consider using a qualified charitable distribution (QCD).

If you would like a second opinion on your giving plan this year, we are here to help. Reach out to schedule time to figure out what your best option is.

Resources for Charitable Giving

Podcast: The Basics of Charitable Giving: Cash, Stock, IRAs

Qualified Charitable Distributions (QCDs): The Basics

Charitable Giving: Using a Donor-Advised Fund