Charitable decisions typically aren’t solely driven by a desire for a charitable deduction. Most of us make charitable contributions because there are causes or institutions that are important to us. Still, we all appreciate the deduction at tax time, and at the very least, we don’t expect our taxes or other expenses to increase because we made a deduction. With those goals in mind, here are a few things you can do to ensure you are making your contribution in the most tax-efficient manner.
Understand How the New Tax Law Impacts You – there are concerns that the new tax law will reduce charitable donations for a couple of reasons. First, the standard deduction has increased from $6,350 to $12,000 for individuals and $12,700 to $24,000 for couples filing jointly. At the same time, deductions for state and local property tax have been limited to $10,000, and the amount of mortgage interest that can be deducted has decreased as well.
Given the increase in the standard deduction coupled with a limitation on some common itemized deductions, many taxpayers will likely forego itemizing their deductions. In these instances, because they aren’t itemizing, they get no deduction for their charitable contribution. In other instances, the taxpayer may be able to benefit from just a part of the contribution. An example would be a taxpayer who files jointly and has $21,000 in other deductions. If the taxpayer makes a $4,000 contribution, she effectively gets $1,000 in write-off from the charity, because her standard deduction is $24,000 vs. the $25,000 deductions she gets if she itemizes.
One potential solution to this problem is to bunch your charitable contributions in a given year. If you typically make $5,000 in donations each year, you can switch to making a $10,000 donation every other year. Depending on the amount of your non-charitable deductions, this can allow you to deduct a greater amount of your charitable contributions since the contribution for the year is higher.
You can pair this strategy with a donor-advised fund (DAF), which is an account you set up and to which you then make charitable contributions. You can invest the contributions you make to the fund, and then distribute to charities whenever you decide to do so. You get the write-off in the year you contribute to the fund (but no write-off when you make contributions from the fund) and can still maintain your annual giving schedule. Finally, if you contribute to the DAF and invest your contributions, over time the value of the fund can grow substantially and neither the growth nor any income generated by the investments within the DAF are taxable to you.
Make Direct Charitable Donations from your IRA – it is possible to make contributions from your IRA directly to a charity. This can be particularly useful if you have to take a Required Minimum Distribution from your IRA but don’t really need that income. Any withdrawal you take from your IRA is treated as income, but for reasons we discussed above, you might find your ability to deduct the contribution limited. If you contribute directly from your IRA, you avoid this problem. The direct contribution isn’t included in your income, and it does count towards any required distribution you have to take. Lastly, making a direct donation from your IRA avoids increasing your Adjusted Gross Income (AGI), and this can help reduce your Medicare premiums, the extent to which your Social Security is taxed and property taxes in some areas.
Donate Appreciated Stock – donating appreciated stock can allow you to take a deduction for the full value of the stock while avoiding the capital gains that would result were you to sell the stock and donate the proceeds. The charity has a tax advantage in that it is not taxed on any gains that result from liquidating the donated stock. This same strategy can be used for other types of appreciated property as well, and not just stock.