As the year comes to a close, many people are thinking about how to support their favorite causes and make a positive impact in the world. Charitable giving is not only a way to express your values and generosity but also a smart financial move that can lower your tax bill and optimize your portfolio. Following are some of the most influential and tax-efficient ways to give to charity before the end of the year.
Using a Donor-Advised Fund
A donor-advised fund (DAF) is a charitable account that allows you to make tax-deductible contributions to a single entity and then recommend grants to various charities over time. A DAF can simplify your giving process, as you only need to keep track of one tax receipt, and you can also invest the funds in the account to grow tax-free until you decide to distribute them.
A DAF can also help you implement other giving strategies, such as donating appreciated assets, bunching donations, and making qualified charitable distributions. For example, you can use a DAF to donate your appreciated assets in one year and then spread your grants to different charities over multiple years. This way, you can take advantage of the tax benefits of donating appreciated assets while maintaining flexibility and control over your giving.
Donating Appreciated Assets
One of the best ways to give to charity is to donate assets that have increased in value, such as stocks, bonds, mutual funds, or even complex assets like cryptocurrency or private equity. By doing so, you can avoid paying capital gains tax on the asset’s appreciation and claim a tax deduction for the full fair market value of the asset on the date of donation. This means you can give more to charity and pay less in taxes.
For example, suppose you bought 100 shares of XYZ stock for $10,000 five years ago, and now they are worth $20,000. If you sell the shares and donate the cash proceeds to charity, you must pay capital gains tax on the $10,000 gain, which could be as high as 23.8%, depending on your income level. This means you will only have $17,620 left to donate to charity, and your tax deduction will be based on that amount. However, if you donate the shares directly to charity, you will avoid paying any capital gains tax, and you will get a tax deduction for the full $20,000 value of the shares. This way, you can give more to charity and save more on taxes.
Bunching Donations
Bunching donations is a strategy that involves making more significant charitable contributions in one year, and then taking the standard deduction in the following year. This can help you maximize your tax savings, especially if you are close to the threshold for itemizing your deductions.
For example, suppose you plan to donate $10,000 to charity each year for the next two years, and your other itemized deductions are $15,000 per year. The standard deduction for 2023 is $27,700 for married couples filing jointly and $29,200 for 2024. If you donate $10,000 each year, your total itemized deductions will be $25,000 each year, which is below the standard deduction amount. This means you will not benefit from itemizing your deductions, and you will miss out on the tax benefits of your charitable giving. However, if you bunch your donations and give $20,000 in one year, and then take the standard deduction in the next year, your total deductions will be $35,000 in the first year and $29,200 in the second year. This way, you can increase your total deductions by $7,300 over the two-year period and save more on taxes.
Utilizing State Tax Credits To Give Back
Some states offer special tax credits for donating to certain types of charities, such as schools, healthcare organizations, or environmental groups. These tax credits can reduce your state tax liability dollar for dollar, up to a certain limit. This means you can save more on taxes while supporting the causes you care about.
According to the Arizona Department of Revenue, Arizona provides three separate tax credits for individuals who make contributions to charitable organizations: one for donations to Qualifying Charitable Organizations (QCO), the second for donations to Qualifying Foster Care Charitable Organizations (QFCO), and the third for donations to Qualifying School Tuition Organizations (QSTO). Here are the details for each credit:
Credit for Contributions to Qualifying Charitable Organizations: This individual income tax credit is available for contributions to Qualifying Charitable Organizations that provide immediate basic needs to residents of Arizona who receive temporary assistance for needy families (TANF) benefits, are low-income residents of Arizona, or are individuals who have a chronic illness or physical disability. The maximum QCO credit donation amount for 2023 is $421 for single, married filing separate or head of household taxpayers, and $841 for married filing joint taxpayers.
Credit for Contributions to Qualifying Foster Care Charitable Organizations: This individual income tax credit is available for contributions to Qualifying Foster Care Charitable Organizations that provide immediate basic needs to residents of Arizona who receive temporary assistance for needy families (TANF) benefits, are low-income residents of Arizona, or are individuals who have a chronic illness or physical disability, and provide immediate basic needs to at least 200 qualifying individuals in the foster care system. The maximum QFCO credit donation amount for 2023 is $1,000 for single, married filing separate or head of household taxpayers, and $2,000 for married filing joint taxpayers.
Credit for Contributions to Qualifying School Tuition Organizations: This individual income tax credit is available for contributions to Qualifying School Tuition Organizations that provide scholarships or grants to qualified schools in Arizona. The maximum QSTO credit donation amount for 2023 is $1,183 for single, married filing separate or head of household taxpayers, and $2,365 for married filing joint taxpayers.
It’s important to note that these tax credits have specific eligibility requirements and limitations, such as a minimum contribution of $500, a list of eligible charities that change annually, and a deadline of April 15 of the following year to claim the credit.
Selling Depreciated Securities To Donate Cash
Another way to give to charity is to sell assets that have decreased in value, such as stocks, bonds, or mutual funds that have lost money, and then donate the cash proceeds to charity. By doing so, you can use the capital losses to offset any capital gains you may have from other investments and claim a tax deduction for the cash donation to charity.
For example, suppose you bought 100 shares of ABC stock for $10,000 two years ago, and now they are worth $5,000. If you sell the shares and donate the cash proceeds to charity. You will have a capital loss of $5,000, which you can use to offset other capital gains, or if no capital gains are available, reduce your taxable income by up to $3,000 and carry forward to future years if you have more losses than gains. You will also get a tax deduction for the $5,000 cash donation to charity, which can lower your income tax liability.
Making Qualified Charitable Distributions
If you are over 70.5 years old and have an individual retirement account (IRA), you can make qualified charitable distributions (QCDs) from your IRA to eligible charities. A QCD is a direct transfer of funds from your IRA to a charity, without going through your bank account. A QCD can satisfy your required minimum distribution (RMD) for the year, up to $100,000 per person, and exclude the amount from your taxable income.
For example, suppose you are 73 years old and have an IRA with a balance of $500,000. Your RMD for 2022 is $18,868, based on the IRS uniform life expectancy table. If you take the RMD as a normal distribution, you will have to pay income tax on $18,868, which could be as high as 37% depending on your tax bracket. However, if you make a QCD of $18,868 to a qualified charity, you will satisfy your RMD for the year, and avoid paying any income tax on the amount. This way, you can reduce your taxable income and support your favorite cause. Your preferred IRA custodian should have a form specific to the QCD, and to ensure the distribution remains qualified, the distribution must go directly to a qualified charitable organization.
Consult With A Qualified Professional
Charitable giving is a rewarding and meaningful way to express your values and make a difference in the world. Using some of the strategies above, you can also optimize your financial situation and save more on taxes. As the year-end approaches, consider how to make the most of your giving and plan for the following year. It’s essential to consult with a tax professional or financial advisor before making any decisions.
This article is for informational purposes and does not constitute any recommendation.
