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6 strategies for charitable tax deductions

The reason people donate is often lost in the discussion about how taxes affect charitable donations.

Tags: Taxes, Charitable giving
Published: October 29, 2019

“I have never worked with a client who gave because of the tax deduction,” says Dan Harris, senior vice president, national director, Philanthropic Services at U.S. Bank Wealth Management. “They give because they are passionate, or they care about certain organizations or causes.”

 

Still, the Tax Cuts and Jobs Act of 2017 raised the standard deduction from $12,700 to $24,400 in 2019 for married couples (and from $6,350 to $12,200 in 2019 for single filers). Industry experts feared that the change would result in fewer people itemizing their charitable deductions, and to some extent, this was true in 2018. Giving USA, an annual report on charitable giving trends, reported that charitable giving by individuals in the U.S. declined by 1.1 percent (3.4 percent adjusted for inflation). The change in the tax code created uncertainty, which likely caused some people to reduce their charitable giving.

 

However, “It’s a truism in the nonprofit world that most charitable donors don’t itemize in the first place,” Harris says. So, in spite of all the uncertainty and confusion, it’s possible that the tax code changes won’t affect charitable giving as drastically as some experts have predicted over the next few years.

 

6 strategies for efficient charitable giving

Because many Americans are likely to continue donating, 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
Donating appreciated assets 
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Instead of donating cash, donors give appreciated assets to a charity, such as publicly-traded stock that has increased in value since you purchased it.

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This allows donors to avoid paying the capital gains taxes they would likely need to pay if they sold the asset for a profit, while simultaneously maximizing the value of the charitable donation.

Bunching donations 
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Donating small amounts each year might not create enough of a deduction to give you a tax break. (For instance, if your itemized deductions, including charitable donations, are less than the standard deduction, you may choose not to itemize and wouldn’t reap the tax benefits of your donation.) 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.

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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 
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Donor-advised funds are somewhat like setting up a charitable foundation but are much simpler to set up. Charities can receive grants from a donor-advised fund over many years vs. a one-time donation, and assets in the fund have the potential to appreciate.

When you donate to 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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Those future grants from the donor-advised fund won’t count as deductions for you, so you can once again take advantage of the increased standard deduction.

Life income gifts 
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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 a donor to take a tax deduction today and receive future income, while benefiting 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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When you’re over 70½ years of age, you can donate up to $100,000 from your IRA directly to a public charity. This applies to both traditional and Roth IRAs. 

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“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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Donate shares of stock to charity, and then buy an identical block of stock at the current market prices.

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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 the donor raises her 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

Donors often want their gifts to have tangible impact, so it’s important to think about what you want your donations to accomplish.  To do that, think through what ‘helping’ and ‘impact’ mean to you.

 

A donor 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, and each donor might have a different preference.

 

Few of us take the time to think carefully about which organizations we give to, how much we donate and why we do so. Harris often asks his clients why they made certain donations and which ones were most important to them, so they can start to get the most out of their charitable giving.

 

While it sounds simple, Harris explains that this exercise often causes people to change how they donate. Many reduce the number or organizations they give to (though not the total amount they’re giving) and find that they get more satisfaction from focused giving.

 

What draws us to give in the first place is a desire to make a difference and to maximize our impact on the world. But even more fundamentally, “People give because philanthropy is joyous,” Harris says. “People want more joy in their lives.”

 

Learn how we can help guide your charitable giving