6 strategies for maximizing your charitable tax deductions
Charitable donations are often talked about in tandem with tax breaks. But the reason people donate is often lost in the discussion.
Tags: Taxes, Charitable giving
Published: April 02, 2021
“I have never worked with a client who gave because of the tax deduction,” says Dan Harris, senior vice president and national director of Philanthropic Services at U.S. Bank Wealth Management. “They give because they are passionate, or they care about certain organizations or causes.”
However, tax deductible donations can reduce your taxable income, which is one tangible benefit of charitable giving. To claim these donations, you’ll need to itemize your deductions at tax time. While the current standard deduction may cause you to think twice about donating to your favorite causes, “It’s a truism in the nonprofit world that most charitable donors don’t itemize in the first place,” Harris says.
NOTE: The CARES Act provision that gifts of cash to qualified public charities by donors who itemize are deductible up to 100 percent of AGI was extended through 2021. For taxpayers who don’t itemize, the CARES Act provision of an above-the-line deduction of $300 of an individual’s cash charitable contributions to qualified public charities ($600 for joint filers) was also extended through 2021. This enhanced deduction expires after 2021.
6 strategies for efficient charitable giving
Whatever your reasons for charitable giving, it’s a good idea to think about the most efficient ways to do so.
“The vast majority of gifts made in the U.S. are gifts of cash,” explains Harris. “But those are not the most efficient.” Here are 6 strategies to help you make the most of your charitable tax deductions.
| Strategies for efficient charitable giving |
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| Donating appreciated assets | |
| Description |
Benefit |
Description
Instead of donating cash, you give appreciated assets to a charity, such as publicly-traded stock that has increased in value since you purchased it. |
This allows you to avoid paying the capital gains taxes you'd likely need to pay if you sold the asset for a profit, while simultaneously maximizing the value of the charitable donation. |
| Bunching donations | |
| Description |
Benefit |
Donating small amounts each year might not create enough of a deduction to give you a tax break. If you plan to donate the same amount of money each year, consider “bunching” the donations into a single year. This bulk donation could increase your potential itemized deduction for that year. |
Doing this could allow you to itemize deductions in the year you give your large donation and take advantage of the increased standard deduction in the other “non-bunching” years. |
| Donor-advised funds | |
| Description |
Benefit |
Description
You create a fund in partnership with an existing 501(c)(3) organization and then advise on the donations. When you start a donor-advised fund, you get a tax deduction for the year in which you make the gift. Then, you can “advise” the fund to make grants to causes you care about in subsequent years.
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Future grants from the donor-advised fund won’t count as deductions, so you can once again take advantage of the increased standard deduction. |
| Life income gifts | |
| Description |
Benefit |
As the name implies, this method involves donating a gift to charity, and in return receiving an income stream for life. Examples include charitable remainder trusts and charitable gift annuities.
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Life income gifts allow you to take a tax deduction today and receive future income, while benefiting the charity in the future. Bunching a life income gift with outright gifts may be especially helpful when itemizing your deductions. |
| Donating from an IRA |
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| Description |
Benefit |
Description
When you’re 70½ or over, you can donate up to $100,000 from your IRA directly to a public charity. This applies to both traditional and Roth IRAs. |
“This allows donors to avoid having to pay income tax on the required minimum distribution and gives the assets directly to the charity,” Harris says. |
| Charitable swaps |
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| Description |
Benefit |
Donate shares of stock to a charity, then buy an identical block of stock at the current market prices. |
You can take advantage of donating an appreciated stock but continue holding that stock in your portfolio. The charity receives the market value of the appreciated assets, and you raise your cost basis going forward. Many investors see this as a win-win: They can potentially lower their future tax bill while giving a charitable organization shares of a stock they believe in. |
Assessing your impact
It’s important to think about what you want your donations to accomplish. To do this, it may be beneficial to define what ‘helping’ and ‘impact’ mean to you.
You might ask, “How many people are being served by my donation to this food bank or that homeless shelter?” But donating to a medical research center at a university, for instance, may have a less quantifiable — though equally profound — impact. It could lead to advancements that would help countless patients in the future. These are both big returns but are assessed differently.
Harris often asks clients a few basic questions to help determine their purpose for giving:
- How do you choose the organizations you give to?
- How do you decide how much to donate?
- Which organizations/donations are most important to you?
While it sounds simple, Harris explains that this exercise often causes people to change how they donate. Many reduce the number of organizations they give to (though not the total amount they’re giving) and find that they get more satisfaction from focused giving.
Most people give because of a desire to make a difference and to maximize their impact on the world. But even more fundamentally, “People give because philanthropy is joyous,” Harris says. “People want more joy in their lives.”
Looking to increase the impact of your giving? Here are 4 steps to finding a charity to support.
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