These days, requests for charitable donations are a year-round occurrence. Whether it’s giving money after a natural disaster, a request from your alma mater, or simply being asked whether you want to “round up” at the checkout line, there are endless opportunities to give.
The end of the year is an especially good time to think about your charitable giving strategy to ensure your donations make the biggest impact, both to the organization and to yourself.
Whether you’re a regular giver or just beginning to think about integrating charitable giving into your finances, having an informed plan will ensure, as Benjamin Franklin said, that you can “do well by doing good.”
An effective charitable giving strategy has three main components, which we’ll cover today.
#1 – Types of Assets to Donate
For small charitable gifts, writing a check or donating via credit card is certainly a popular and easy option. Documentation for cash gifts, no matter how small, is key. Make sure you keep donation receipts, canceled checks, or credit card statements as proof of your gift.
It’s also important to remember that you may not receive a dollar-for-dollar tax deduction for your cash gifts in a given year. Deductions for cash donations are limited to 60% of your adjusted gross income (AGI) in a single tax year, with any contributions above these limits carried forward for up to five years.
In 2020 and 2021, the CARES Act encouraged donations to charitable organizations by giving all taxpayers a $300 (single filer) or $600 (married filing jointly) deduction for cash gifts. It’s important to be aware that this deduction was not extended to 2022.
Despite the stock market’s volatility in 2022, many people still have appreciated holdings, such as stocks, mutual funds or exchange traded funds, in their portfolio. Shares that have been held more than one year can be donated directly to a charity.
The benefit of this type of donation is twofold:
- Rather than having to sell appreciated investments to generate cash to donate, which would result in paying tax on capital gains, the shares can be directly transferred to a charity.
- The organization receives the market value of the shares as a donation and can subsequently sell the investments tax-free because of its non-profit status.
Donations of investments are generally deductible up to fair market value, but it’s important to remember that current deductions are capped at 30% of AGI, with a 5-year carryforward.
Tangible Personal Property
Many organizations gladly accept used items such as clothing, furniture, or even vehicles, as long as they are considered to be in “good” condition under IRS rules. Most used household items, such as those donated to Goodwill or Salvation Army, should be valued at “thrift store prices” when determining an appropriate deduction amount.
Items donated over the course of a year worth more than $250 but less than $500 should be documented and include the name and address of the organization, a description of the items donated, the original cost, and current fair market value of the items donated.
Donations exceeding $500 fair market value up to $5,000 need to be documented on IRS Form 8283, which asks for more detailed information on the item’s condition, acquisition cost, and methodology for calculating the fair market value. Donations exceeding $5,000 in value require all the items listed above, in addition to an appraisal by a qualified appraiser.
#2 – Tax Benefits of Giving
For some, the tax benefit received from making charitable contributions is secondary to supporting organizations doing meaningful work. For others, reducing tax liability in a given year is the primary motivating factor.
Regardless of where you fall, being aware of current laws and adjusting your charitable giving strategy appropriately can lead to some meaningful tax savings.
Standard Deduction Versus Itemizing
One of the biggest tax considerations when it comes to charitable giving is whether you take the standard deduction or itemize. The Tax Cuts & Jobs Act of 2017 nearly doubled the standard deduction and reduced or eliminated a lot of tax deduction items.
The standard deduction for single or head of household taxpayers in 2022 is $12,950. A married couple needs over $25,900 in deductions in order to itemize in 2022.
How does this relate to your charitable giving? Think of the standard deduction as the “hurdle” your deductions must overcome to realize any additional tax savings specifically from charitable giving. If your charitable giving plus other deductions don’t exceed the standard deduction, you are receiving the same tax benefit as if you had not donated anything to charity for the year.
Donor Advised Funds
Because of the high standard deduction, the popularity of Donor Advised Funds has skyrocketed in recent years. A Donor Advised Fund (DAF) is an account established specifically for charitable giving and can be opened with big brokerage firms like Schwab and Fidelity at very low annual costs.
Contributions to DAFs can be made with cash. A more beneficial strategy from a tax perspective, however, is funding a DAF with appreciated securities like stocks or mutual funds, real estate, crypto currencies, or even privately held businesses.
The tax deduction for the contribution to the DAF is received in the year the contribution is made, and gifts to charitable organizations can then be spread out over subsequent years.
For those looking to turbocharge their tax deductions, consider a “bunching” strategy. Several years of charitable contributions are made in a single tax year–enough to exceed the standard deduction–and charitable gifts are spread out over several years.
Qualified Charitable Distributions
Qualified Charitable Distributions, or QCDs, are a great option for individuals with Individual Retirement Accounts (IRAs) who are 70.5 or older to give to charity and save on taxes.
Donations can be made directly from IRA accounts and the amount withdrawn is not subject to tax, as with regular IRA withdrawals. For those who have reached age 72 and are subject to annual required minimum distributions, a QCD will count towards the RMD, again reducing the tax that would be paid otherwise.
The maximum amount that can be given to charity in a year via a QCD is $100,000 and it’s important to still keep detailed records for tax purposes.
#3 -Values Behind Your Giving
Beyond the technical aspects of giving, one of the most important considerations to any charitable giving plan is a thorough understanding of your personal values and goals.
Start by taking a step back and contemplating what motivates you to give – is it the “warm-glow” you feel when making a donation, concerns for the benefit of others or causes, or some combination of the two?
Thinking through these factors can help you make rational giving decisions, make impactful gifts, and have a thought-out response when solicited for support.
We’re Here to Help
If you are ready to start thinking about a charitable giving plan, or need guidance on adjusting your current plan, please reach out. We’re here to help.
Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR and virtually throughout the U.S.