Holiday donation drives are in full force, and you may be considering how to allocate any spare amount of money you can give toward causes you care about. I often discuss charitable giving with clients, because believe it or not, it’s an important part of an overall financial plan. If you want to read more about one of my favorite charities, you can check out this article from Financial Planning Magazine!
You probably often hear that donating to a charity is also good for the donor because it’s a tax deduction. Well, it may be, but it depends on a few factors and due to the increase in the standard tax deduction, fewer people will actually lower their tax bill by giving to charity. It’s true that charitable giving can provide you with helpful tax benefits, but if one of your goals in giving is to do so in a way that lowers your taxable income, you need to be strategic about how you give.
When Can You Get a Tax Deduction for Giving to Charity?
It helps to understand how taking a charitable deduction works and why it may not be worth it for your personal situation. To take a charitable deduction, you must itemize your deductions when you do your taxes, instead of taking the standard deduction — and itemizing isn’t for everyone.
The new tax law that came into effect for the 2018 tax year nearly doubled the standard deduction to $12,000 for individual filers and $24,000 for married people filing jointly. That makes it less of an advantage to itemize even for those who typically did it before (like homeowners, parents, or people who give large donations to charities).
Fun Tax Tip: Itemize Every Other Year
If you plan to give generously but won’t exceed the standard deduction amount, you won’t take tax deduction for your donations because taking the standard deduction would be a better choice for you. But by adjusting the timing of your giving, you can get that tax deduction after all.
How Would This Work in Real Life?
Let’s say a married couple donates $15,000 every year. In 2017, they would have itemized their deductions because the standard deduction used to be $12,700 for married filers. But the standard deduction is now higher than the $15,000, so it wouldn’t be necessarily be worth it to itemize, instead they would claim the standard deduction of $24,000.
That would look like this:
- 2018: Donate $15,000
- Take $24,000 standard deduction for 2018
- 2019: Donate $15,000
- Take $24,000 standard deduction for 2018
- 2018: Donate $15,000
- Total deductions for 2018 and 2019: $48,000
However, what if the couple bunched their annual donations and then itemized every other year? It would look like this:
- January 2019: Donate $15,000 (their gifting for 2018)
- December 2019: Donate another $15,000
- Take $30,000 itemized deduction for 2019 + any other itemized deductions they have.
- 2020: No charitable giving
- Take $24,000 standard deduction for 2020
- Total deductions for 2019 and 2020: at least $54,000!
This couple would still donate $30,000 to charity, but by timing their donations to fall in the same tax year and only itemizing for that year, they would be able to deduct at least $6,000 more than if they had given the same amount of money over two different tax years.
How Else Can You Give to Charity in a Tax-Advantaged Way?
You can gift assets besides cash to charity, and doing so may allow you to save on taxes (which means more of your assets go to a good cause instead of paying taxes!). There are two ways to donate that I’m a big fan of:
Donating Appreciated Securities
If you’ve owned shares of stock, a mutual fund, or other security for more than a year, those securities are considered “appreciated” — if you were to sell them today, you’d owe the lower capital gains tax rate (15% for most people) on the gain, instead of your higher ordinary income tax rate.
If the value of your securities has increased, you can simply donate the appreciated securities directly to the charity and you won’t have to pay capital gains tax. The charity gets 15% more of the value of your donation and you get to deduct the value of the securities at the time you donated (if you itemize your taxes).
This is my favorite way to give to my alma mater every year! I started a Theatre Scholarship in my name a few years ago and each year I look at my investments and donate the ones which have appreciated the most.
Donor Advised Funds (DAF)
This special type of account allows you to set aside cash or appreciated securities to eventually give to the charities of your choice. This will give you time to accumulate funds while you decide where you want your donations to go. It’s also a great place to put stock or investments that have a really low basis (i.e. inherited stock, employer stock, etc.).
You receive a taxable deduction in that year that you move cash or investments to the DAF based on the Fair Market Value of the securities when they’re moved into the DAF. If you have highly appreciated stock that you want to donate before the end of the year, but you’re not sure which charities you want the money to go to, set up a DAF and move the money there.
Any money in the DAF can be gifted to charities at any time and over multiple years. I have a client who received an inheritance and made a large contribution to a DAF and then has monthly distributions set up to 10 different charities. This makes it easy to track for tax purposes as well. You can also invest a portion of the money if you know you won’t be giving it all away over the next few years.
You can open a DAF through a discount brokerage firm. My two favorites are Vanguard Charitable and Schwab Charitable. Vanguard has the lowest fees for investment options but a high $25,000 minimum to set up the account, while Schwab’s minimum is only $5,000 to open an account.
Using a DAF makes it easy to itemize every other year! You can put assets into the fund in the years you intend to itemize, but then donate from the fund even in the years that you don’t itemize since you get the deduction when you make the contribution to the fund (as opposed to when you donate directly to the charity).
When to Seek Professional Advice
It’s important to talk about the tax ramifications of charitable giving with a professional, especially when you plan to donate very generously. I recommend working with a financial planner, tax professional, or both to create a plan for your donating.
I’m a huge proponent of using your money to match your values so you can live your ideal life and help others along the way. If you’d like to begin gifting money to good causes but want to create a plan to do so, I’d be happy to help!