Giving to charity is a wonderful way to help serve the needs of others, especially those who are less fortunate. The satisfaction you derive from knowing that you have made a difference in even one life is unlike any other feeling. Of course, personal satisfaction is not the only benefit you can derive from charitable giving. In addition to the non-tax benefits for the donor and the recipients, your donations also have financial benefits (i.e. tax benefits). In this article, read more about the primary tax benefits of donating to a charity.
Before you donate to any charity, consult with an experienced financial advisor for specific advice for your situation. Donors should understand all of the tax benefits available to them in order to take maximum advantage of them. Also, once you identify a charity you want to support, make sure the charity is a qualified tax-exempt organization. The charity will tell you if it has tax-exempt status. The IRS also has a search tool you can use to check the organization’s status.
Here are some of the tax benefits you may be able to use for your charitable donations:
Donate Directly from Your IRA
If you are older than 70½ and have a traditional IRA, you can transfer up to $100,000 per year tax free from your IRA directly to the charity. This distribution can count as your required minimum distribution. The good news is these charitable distributions are not taxable if you follow the rules for a qualified charitable distribution (QCD). Discuss it with your IRA administrator to ensure you follow their procedures for tax free charitable distributions.
This is one of the best tax benefits available for older individuals. It allows you to take the new tax law’s higher standard deduction and still get a tax break for your charitable donation. This benefit is only allowed for required withdrawals from IRAs. You cannot do it with a Roth IRA or a 401(k).
Any donation you make will be counted as part of your required minimum distribution, but because the donation goes directly to the charity and not to you, the donation amount is not counted as part of your adjusted gross income (AGI). This may reduce your tax obligations on Social Security income, and may allow you to qualify for lower Medicare Part B and Part D premiums.
Donate Appreciated Assets
Instead of a cash donation, consider donating appreciated assets. Common non-cash donations include company stock, mutual fund shares, or similar intangible, liquid assets that have grown in value. To qualify for this tax benefit, the donor must have owned the asset in a taxable account for at least one year.
Donating appreciated assets can give you two tax benefits. The donation will let you avoid paying capital gains tax on the appreciated asset, thereby reducing your taxable income. You can also claim charitable deductions if you itemize in the year you donate.
Note that the law imposes an annual deduction limit on donating an appreciated asset, which is 30 percent of your adjusted gross income. A popular way to donate an appreciated asset is to create a donor-advised fund (DAF). Move the asset into the DAF where it can be sold and the proceeds sent to the charity. You can create a DAF account at one of any number of well-known fund management companies.
Using a DAF allows you to claim a charitable tax deduction in the year of funding a DAF. You can make grant requests to the desired charity (ies) over one or more years. Through a DAF, a married couple could donate $20,000 in year one, but spread the actual grants made to charities over a two-year period.
Be sure to consult a tax specialist about how a DAF can be an important tax-saving vehicle for your donations.
Bunch Your Donations
Under the tax laws that went into effect in 2018, the standard deduction was changed to $12,000 for single filers and $24,000 for married couples filing jointly. Keep in mind that many people are better off claiming the standard deduction rather than itemizing. If you are one of those taxpayers, you may be able to claim a charitable deduction by using a “bunching” strategy—meaning that you shift your donations into a single tax year.
If annual donations are still your preference, you should consider using a DAF, described above. A DAF allows you to bunch, make annual donations, and deduct your contributions in the same year.
Create a Private Foundation
If you would like to make multiple contributions to charitable organizations, consult a tax advisor about establishing your own tax-exempt private foundation. The rules applicable to foundations require a set amount of charitable spending and distributions each year.
Contact The Last Well for more information
For more information about the benefits of donating to charities, speak to the experts at The Last Well. We will be happy to answer your questions and discuss the different ways your donations can make a difference!