Giving to Charity Before Year-End? 3 Smart Ways To Boost Your Tax Benefits

Helping others is always rewarding, and it can be even more impactful when done strategically. By donating to an IRS-qualified 501(c)(3) public charity, you may be able to reduce your taxable income. And if you do it smartly, you can maximize the benefits not only for yourself but for your recipient, as well.

Here are three strategies that certified public accountants (CPAs) say can save you the most money when supporting causes you care about.

1. Donate Appreciated Investments for a Bigger Tax Break

Donating stocks, bonds, or other securities that have grown in value is often more cost-effective than the traditional method of giving cash or checks. That’s because you get the added benefit of avoiding any capital gains tax on those assets.

“If you’re a taxpayer who itemizes deductions (instead of electing the standard deduction), you can deduct the full fair market value of the gift (up to 30% of your adjusted gross income) and avoid paying capital gains tax on the appreciation,” the Illinois CPA Society said in a statement.

The process is relatively simple and generally requires taking the following steps:

1. Verify that the organization is an IRS-qualified 501(c)(3) charity and accepts investments as gifts.
2. Identify the securities to donate, prioritizing those that have appreciated in value the most and have been held for at least one year.
3. Request the charity’s stock transfer instructions.
4. Ask your brokerage firm to transfer your selected securities directly to the charity’s brokerage account.
5. Obtain a receipt from the charity and a transaction record from your brokerage. Keep these documents in a secure place.
6. Claim the tax deduction on your income tax form, completing Form 8283 if required.

2. Use a Donor-Advised Fund to Maximize Flexibility and Deductions

If you want immediate deductions with flexible giving, you might consider using a donor-advised fund (DAF), an investment account set up with the help of a sponsoring organization, such as a community foundation or a financial institution’s charity arm, specifically for charitable giving.

“When you contribute cash, securities, or other assets (such as land or a ranch) to a DAF, you are generally eligible to take an immediate tax deduction,” said Jennifer Kohlbacher, director of wealth strategy at Mariner. “The assets inside the DAF can then be held, sold (free of tax), invested for tax-free growth, and then granted to charities of your choice over time. The balance of assets inside the DAF is held outside of the estate, also protecting those assets from estate tax.”

With DAFs, there are typically no setup costs, and administrative responsibilities are handled by the sponsoring organization, making them a simpler and more cost-effective alternative to private foundations. However, there are a few important caveats to consider:

• Annual fees typically range from 0.5% to 1%.
• Contributions are irrevocable.
• Donors retain advisory privileges over grant recommendations but do not have legal control of the assets.

3. Make a Qualified Charitable Distribution if You’re 70½ or Older

If you’re 70 ½ or older, the IRS allows you to transfer up to a certain amount of funds directly from your IRA to a qualified charity. This maneuver is known as a qualified charitable distribution (QCD), and the primary benefits, besides helping worthy causes, are as follows:

• The amount donated is excluded from federal taxable income.
• It can count toward satisfying your annual required minimum distribution (RMD).
• It lowers your adjusted gross income (AGI), which can prevent you from being pushed into a higher tax bracket, reduce taxes on Social Security benefits, and potentially lower your Medicare Part B and Part D premiums.

Another advantage of QCDs is that you don’t need to itemize deductions to benefit. “The QCD allows for the tax benefit of the contribution to charity on top of the standard deduction,” Kohlbacher said.

The Bottom Line

By strategically donating appreciated investments, using a donor-advised fund, or, if you’re old enough, making a qualified charitable distribution from your IRA, you can simultaneously maximize your tax benefits and support the organizations you value.