It's hard to believe we're winding down 2024, isn't it? This time of year, many of us reflect on ways to give back and support causes close to our hearts. For those with a charitable mindset, year-end is a prime time to make meaningful contributions. And when it comes to charitable giving, a little planning can go a long way in ensuring that your generosity is both impactful and tax-efficient.
Here’s how to make the most of your charitable contributions, including strategies to maximize your tax savings and tips on choosing the right methods for giving.
Charitable giving should come from the heart, but there’s no reason not to approach it with a smart financial strategy. Taking advantage of tax-efficient giving options allows you to stretch your contributions further, potentially allowing you to give more without increasing your financial burden. By making a plan and understanding how charitable deductions work, you can support the causes you care about in a way that aligns with your broader financial goals.
One of the most tax-efficient ways to give is by donating appreciated securities, like stocks, directly to a charity. When you donate securities that have grown in value, you avoid paying capital gains tax on the appreciated amount, while still being able to deduct the fair market value of the securities at the time of donation.
This approach is especially valuable if you’ve held the securities for over a year, as you’ll receive the full tax deduction and the charity receives the entire value of the stock, tax-free. Plus, this method could allow you to give more than if you were to sell the securities first, then donate the after-tax proceeds.
A donor-advised fund (DAF) is a powerful tool for those looking to make tax-efficient contributions while having flexibility in timing. When you contribute to a DAF, you receive an immediate tax deduction, even if the funds aren’t distributed to charities right away. You can then recommend grants from your DAF to your chosen nonprofits over time.
DAFs offer several benefits, including simplicity, immediate tax advantages, and the ability to invest funds within the account for tax-free growth until you decide to disburse them. They’re particularly helpful for those experiencing a high-income year, as they allow you to front-load donations and take advantage of a larger deduction.
If you’re over 70½ and have a traditional IRA, you can make a Qualified Charitable Distribution (QCD) directly from your IRA to a qualified charity. QCDs allow you to give up to $100,000 per year tax-free, and this amount counts toward your Required Minimum Distribution (RMD) if you’re age 73 or older. This means you can satisfy your RMD while supporting a cause, without increasing your taxable income.
QCDs are an effective strategy if you don’t itemize deductions or if you want to reduce the impact of your RMDs on your taxable income. It’s a win-win approach for giving back while potentially lowering your tax liability.
For individuals and families who itemize their deductions, “bunching” charitable contributions can maximize tax benefits. In a bunching strategy, you consolidate multiple years’ worth of charitable donations into a single tax year to surpass the standard deduction threshold and take advantage of a larger charitable deduction.
This approach can be particularly helpful if your annual giving isn’t enough to exceed the standard deduction. By bunching contributions in one year and taking the standard deduction in alternate years, you may create a more tax-efficient pattern of giving.
While larger strategies like donating appreciated assets or using a DAF can have significant tax benefits, remember that smaller acts of giving also matter. Consider making cash gifts or volunteering your time as well. While cash donations may not be as tax-advantageous as some other methods, they’re straightforward and impactful. In addition, out-of-pocket expenses from volunteering (such as mileage, supplies, or uniforms) may be deductible if they’re related to charitable activities.
At the end of the day, charitable giving is personal. There’s no “one size fits all” strategy, and what works best will depend on your financial situation, goals, and the causes that matter to you. By discussing your options with your Wealth Advisor or tax professional, you can tailor a giving strategy that aligns with both your philanthropic and financial goals.
Whether it’s through appreciated assets, a donor-advised fund, or qualified charitable distributions, there are many ways to make the most of your contributions while maximizing tax savings. And as you support the organizations and communities you care about, remember that thoughtful planning can make your generosity go even further.
This season, consider taking a closer look at how you give. Tax efficiency isn’t just about saving money—it’s about being able to do more good with the resources you have.