Ways to Make Your Charitable Giving Count Come Tax Time

When it comes to managing personal finances, charitable giving is a well-established tool often used to assist individuals and small businesses with year-end tax planning. With strategic and well-timed donations, you can minimize tax liability while supporting the causes you hold dear.

Traditionally, people consider charitable giving simply as writing a check to a few non-profit organizations near the end of the year and claiming a tax deduction. While that approach can certainly be valuable, it is a bit limited in its ability to maximize philanthropic impact or minimize income tax liability.

From a financial perspective, cash donations to charity have become less valuable to the donor than they used to be. This can be contributed to the 2017 Tax Cuts and Jobs Act (TCJA) that almost doubles the standard deduction for most taxpayers. The TCJA also limits the amount of state and local taxes that may be applied against a filer’s federal income tax liability. Which means, unless you are a person who has a large mortgage with plenty of interest to write off each year, it is tougher to itemize contributions and receive a deduction for your charitable giving.

For those who have a habit of giving to charity annually, one solution that has gained popularity in recent years is to “stack” those charitable donations. Stacking is simply a strategy whereby taxpayers bundle multiple years’ worth of charitable donations into a single year rather than making those gifts yearly as they normally would.

For example, a couple who has a history of giving $15,000 to their church every year may instead decide to offer a gift of $45,000 this year and donate nothing for the next two years. This allows them to reach above the standard deduction threshold for this calendar year and itemize to realize the full tax benefit of their charitable giving.

Rather than stacking donations by simply writing a hefty check for a charity, another way to ensure you receive the full tax benefits of your gift is to establish a donor-advised fund (DAF). Once thought of only in the context of estate planning, DAFs have become a popular means of receiving a full deduction for charitable giving under the new tax rules. Utilizing a DAF allows you to grant donations over a longer period while realizing the full tax benefit now.

Revisiting the example above, if that same couple were to contribute $45,000 to a DAF in 2021, they would still receive credit for the full $45,000 on their 2021 tax return. However, the couple would be permitted to take their time identifying which charities to donate to, how much to give, and when to make those donations. In the meantime, the tax-deductible cash contributions made to the DAF can be invested in the market and grow tax-free, enabling them to make even larger donations in the future.

Gifting long-held publicly traded stock offers another win-win tax planning solution. In addition to cash contributions, the Internal Revenue Service (IRS) tax code allows you to gift publicly traded securities, such as stocks, bonds, mutual funds, exchange traded funds, etc. For someone looking to liquidate a large amount of appreciated securities, donating them first to a DAF provides additional benefits. If you sell the stock first and then gift the cash, you are required to pay capital gains taxes on the net proceeds of the transaction. However, many charities will accept donations in the form of stock. So, as the donor, you get to claim a fair market value deduction of the stock on your income tax return while avoiding capital gains taxes on the gifted securities.

For those who receive company stock as part of their compensation package, whether publicly traded or privately held, there is also the option to gift Restricted Stock Units (RSUs) or other types of stock compensation to the DAF. So, while the exercise or vesting of equity compensation awards can cause some serious heartburn when it comes to tax planning, those executives and key employees who receive them could look to a DAF as a means to help reduce that tax liability.

For seniors who have reached the age where they are now subject to the Required Minimum Distribution (RMD) rules, the IRS allows them to donate directly from an individual retirement account (IRA) either to a charity or a DAF. The transaction is referred to as a qualified charitable distribution (QCD). In doing so, the DAF and its ultimate beneficiaries receive the full distributed amount as a donation, while the donor avoids having the amount of the distribution added to their taxable income for that year.

While one of the major positive effects of supporting charitable causes is simply to feel good about giving, what and how you give can be just as important as how much you give and to whom. Deciding which assets to donate and how best to structure giving is where the real tax strategies of charitable giving come into play. And since you are going to be giving one way or another – either to the IRS or to a cause that you actually care about – you might as well be the one to make that decision.

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The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. It should not be considered a solicitation to buy or an offer to sell a security. The views expressed in this commentary are subject to change based on market and other conditions. This writing may contain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Be sure to consult with your tax and legal advisors before taking any action that could have tax consequences. Investments in securities and insurance products are: NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE

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