As Lynne Twist says in her book, The Soul of Money, “When you make a difference with what you have, it expands.” Giving your resources in a way that’s aligned with your values can have a compounding effect on your overall wealth and well-being. Giving to charity, as it happens, can also offer some worthwhile tax deductions.
In this post, we’ll outline what we hope is a helpful approach to how you can optimize your charitable giving, depending on what’s right for you.
Set Your Intentions First
How much you give is not so important as how and why you give it. Research shows that even giving a few dollars can boost your mood, but the benefits of giving are not universal. Instead, the rewards of your generosity depend on your unique personality and circumstances. If your intentions for giving are solely to reap the benefits of tax deductions, that’s completely acceptable; that’s why tax breaks exist in the first place, to incentivize actions that better our society. So, before you consider your particular strategy for charitable giving, first understand what it is you want to accomplish and why you’re giving in the first place.
Tax Deductions
Generally, it only makes sense to deduct charitable contributions from your taxes if you are itemizing your deductions. The standard deduction in 2022 is $12,950 for single filers and $25,900 for married couples filing jointly. These thresholds of the standard deduction serve to simplify tax filing, making it so that the vast majority of taxpayers wind up claiming the standard deduction. Homeowners are the most likely to itemize their deductions because mortgage interest is an itemized deduction that can push you over the threshold of the standard deduction.
If tax deductions are a consideration for you, keep in mind that whichever charity you give to must be a 501(c)(3) organization in order to qualify. This should be clearly stated on the charity’s website. Furthermore, CharityWatch and Charity Navigator are websites that can help you understand both the tax status of charitable organizations and to what extent they’re accomplishing their goals.
Maximize Impact With Regular Donations
Most people donate to charities with cash (bank transfers, credit cards, Paypal, etc). One of the best things you can do to maximize your impact is to set up automated, recurring donations, ideally on a monthly basis. This will help stabilize the revenue stream of the organization, which allows them to funnel more resources into innovation and action than into raising funds. Donating to charity on a monthly basis can also simplify your own cash flow picture, helping you plan more reliably for charitable giving. If you plan on donating a lump sum of money instead, or if you think you’ll be donating significantly larger amounts of money, read on to see if one of the following strategies could potentially make more sense for you.
Donate Appreciated Stock
If you hold shares of stock for individual companies, it may make sense for you to donate them directly as part of your charitable giving plan. Donating shares of stock to charity can provide some significant, yet nuanced, tax benefits. Do your research or talk to a financial planner to make sure this strategy makes sense within the context of your long-term financial goals.
The key to optimizing this strategy is to donate appreciated stock that you’ve held for at least a year. This is beneficial for a few reasons: First, you’re giving more because you are avoiding capital gains tax on the stock, which can be 15 – 20% on the growth, depending on your tax bracket. The charity is also not taxed on this growth, so it’s a win – win. Second, you diversify your portfolio by removing individual stocks, which inherently expose you to more risk of losing money should that one company fall on hard times. Third, this is a tax deductible donation if you itemize your taxes, and you can claim a tax deduction based on the fair market value of the stock at the time of transfer.
Again, this is a nuanced approach. Deduction limits are based on your adjusted gross income, which, in recent years, has been 30%. By comparison, you can deduct up to 60% of your adjusted gross income for cash donations. Finally, be sure to check with the charity to see if they can accept donations of stock. For example, one of our favorite charities, SAGE, has a special page that gives instructions on how to donate stock.
Make a Qualified Charitable Distribution
Qualified charitable distributions can be a very tax-advantaged strategy for retirees and others receiving required minimum distributions (RMDs) from a qualified retirement account, such as a Traditional IRA. Normally, RMDs are taxed as ordinary income, but you actually have the option of redirecting these distributions to charity (up to $100k per year for individuals, and $200k for married couples). The benefit here is that you satisfy your RMD requirements for the year, and that amount is also not included in your taxable income. Instead of paying with after-tax dollars to charity, you can actually reap the tax benefit of excluding it from your total income.
Set up a Donor-Advised Fund
Donor-advised funds are essentially investment accounts that are irrevocably (meaning you can’t reverse your decision) designated for charity. This strategy is a bit more complex and costly, and requires that you find an organization that will establish and maintain a donor-advised fund for you, which involves ongoing fees. This strategy could make sense if you come into a large sum of money in a given year and could benefit from taking a big tax deduction in that year. Then, you would spread out your charitable donations over the course of many years. The assets within the donor-advised fund could be managed so that they grow over time, allowing you to stretch out the amount you can give. You can also add to the fund whenever you’d like.
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Brandon Tacconelli is the Director of Client Care at Thinking Big Financial, Inc. Thinking Big is a fee-only financial planning firm in New York City specializing in working with the LGBTQ+ Community.