There is no wrong way to give. However, applying tax saving strategies can save you money on your charitable dollars. The new tax code will force many more people to take the standard deduction (90% vs. 70%). Those who are used to itemizing might now think there is no longer a tax incentive for charitable giving. We want you to know there are still ways to reduce your taxes by giving to the charities you care about.
Stacking Cash Donations
If you typically write checks to charities or use your credit card for donations, you still get a tax deduction if you itemize. If you are no longer able to itemize, it doesn’t mean you will never get a write-off for your donations. You might just need to be a little more strategic about when you make your charitable contributions. For example, if you traditionally give cash donations of $2,000 annually, and you don’t have enough deductions to itemize, you might want to consider “stacking” your charitable contributions. Instead of giving $2,000 in 2018 and $2,000 in 2019, consider giving $4,000 in 2018. This could allow you to itemize in 2018 – giving you tax savings – even though you will claim the standard deduction in 2019.
Donating Appreciated Assets
If you have appreciated shares of stocks or mutual funds and you give cash to charities, STOP! You get more tax benefits by donating shares of appreciated stock (which you held for at least a year). You receive a deduction for the full value of the transfer, while avoiding capital gains tax on the appreciation. Combine this strategy with the above mentioned “stacking” technique to avoid capital gains and reduce your taxes.
Establishing Donor Advised Funds
A donor advised fund (DAF) is a tax-efficient and convenient way to stretch your charitable donation dollars. Before you decide not to read further, please know that a DAF is not limited to the ultra-wealthy. Some foundations allow you to open a fund for as little as $1,800 and your grants (what you want to donate to your favorite charities) from your fund can be as small as $100 each. If you tend to make significant charitable contributions each year, a DAF can give you greater tax savings, boost your charitable dollars and provide more convenience and flexibility.
Here’s how a DAF works: A DAF is like a “charitable IRA.” You get a tax deduction as soon as you contribute to the DAF and the money is invested until you decide to make grants to the charities of your choosing. By investing your charitable funds, you will have a larger pool from which to make donations. When you want to donate to a charity, you simply log in to your online DAF account and designate the amount and recipient of your grant. At the end of the year, you no longer need to list each individual contribution on your tax return. Your DAF will summarize your annual contributions and you only need to report one number. Many DAF’s also serve as your charitable giving liaison, helping with research and recommending the best charities in in your areas of interest.
Putting It All Together
By combining all three of these suggestions, you can get the most bang for your buck. You can stack the contributions of appreciated shares to your DAF, giving you an immediate tax break in the contribution year, minimizing capital gains tax, and growing your charitable funds tax free until you make a distribution to a charity. Ultimately, with proper planning you can maximize your charitable giving in the most tax efficient way, benefiting both the charitable organizations and you.