A Guide to Charitable Contributions:
5 Ways to Improve Your Tax Benefits
If you’re like many donors, your charitable contributions are often gifts of the heart. You feel connected to the non-profit organizations you support, and you care deeply about helping them achieve their missions.
But the more you give, the more important it becomes to approach your charitable contributions from a strategic mindset. Well-planned charitable giving can reward you with significant tax benefits that can actually strengthen your financial security and amplify your philanthropic impact. Here are 5 of the key takeaways to consider as you begin to build your own tax-smart charitable contributions strategy.
1. Choose the right assets to donate (Hint: it’s not always cash!)
According to the IRS, 75% of the charitable contributions in our country come from cash assets (money in our bank accounts) but 90% of this country’s wealth is held in non-cash assets, including real estate, retirement plans, investment holdings, life insurance, farms, and business interests. Non-cash assets often generate capital gains that are heavily taxed by the government—unless those gains are re-routed to your favorite charities instead.
So, as you’re planning your charitable donations, don’t simply default to giving from your bank account. Instead, map out your non-cash assets, identify which ones have a future capital gains tax bill attached to them, and plan out how you will funnel those gains toward the charities of your choice—instead of into the government’s coffers. (Sidebar: check out our blog on non-cash asset-based donations for a deeper dive on this topic.)
2. Factor your age into your charitable planning
As you get older, your tax strategy and your charitable giving strategy should work more closely together than ever before. Here are three examples of what we mean:
- If you’re 65 and older, the standard deduction that the IRS allows for you is typically higher. Are your charitable contributions enough to surpass that threshold and push you into itemized deduction territory? Itemized deductions can help you realize greater tax savings and make your donation dollars go further.
- If you’re 70.5 and older, the IRS allows you to transfer up to $100,000 of your individual retirement account (IRA) distributions each year to charity, tax-free. If you’re a married couple and you each have your own IRA, you can both opt to transfer up to $100,000 to charity for a total of $200,000 per year. These transfers are called qualified charitable distributions (QCDs). The IRS even allows QCDs to count towards your annual required minimum distribution once you hit age 72.
- Believe it or not, charitable contributions can even reduce your Medicare premiums. Your Medicare Part B and Part D premiums are based on your Modified Adjusted Gross Income (MAGI) two years prior. Certain charitable contributions that you make now—like the aforementioned QCDs—can help you reduce your MAGI, and therefore reduce your Medicare premium two years down the road and beyond.
3. “Prepay” your charitable contributions for immediate benefits with a donor-advised fund
A donor-advised fund is a charitable investment account that you can set up in order to award “grants” or charitable contributions to your favorite charities over time. Once your dollars (or other assets) are in a donor-advised fund, they are irrevocable and can only be used for charitable contributions. However, the tax benefits of a donor-advised fund far outweigh the limitations, especially if you’re a disciplined giver who makes regular donations. Let’s look at a quick example:
- Let’s say you historically give $10,000 a year in cash to the charities of your choice. At that level, you’ve only ever qualified for the IRS’s standard deduction each year.
- After talking to your financial planner, you decide to combine 10 years’ worth of annual giving—$100,000—in cash, securities, and other assets into a donor advised fund.
- You now qualify for two major tax benefits you didn’t qualify for before: you’ve earned a significantly higher itemized tax deduction based on your initial $100,000 fund contribution and you’ve eliminated the capital gains taxes associated with the non-cash assets you donated directly into the fund.
Many sponsoring organizations for donor-advised funds, such as Fidelity and Charles Schwab, also offer investment options for the charitable contributions you make to your fund. Your dollars can grow tax free, creating even more giving power for you down the road.
4. Remember that different assets have different income tax deduction limits
The tax treatment of your deductible donations depends on several factors, such as the amount of contribution, your adjusted gross income (AGI), and the type of asset you donated. For tax year 2023, you can deduct up to 60% of your AGI for cash donations to qualified charitable organizations. For non-cash contributions, such as capital gain property, the deduction limit is 30% of your AGI. The IRS allows you to carry over any contributions that exceed the annual limits based on your AGI.
Keep in mind that donations to individuals, political campaigns, and civic leagues (registered as 501(c)4s) do not qualify for deductions. Additionally, if you receive any goods or services in exchange for your donation, you can only deduct the amount of the contribution that exceeds the value of the goods or services you received.
5. Build a three-pronged charitable planning advisory team
As you’ve probably gathered by now, building a charitable contributions strategy that maximizes your tax benefits can be mind-bendingly complex. There are endless variables at play, and one decision can have a major ripple effect across all your finances. With that in mind, we strongly recommend having three key advisors in place who can help you navigate all the nuances of charitable giving:
- CPA – Your CPA’s job is to help you save the most on taxes this year based on the latest tax laws and provisions.
- Financial Planner – Your financial planner should manage your overall financial strategy—including your charitable giving strategy—so that you are able to reduce your tax burden, improve your financial security, and amplify your charitable giving five, 10, and 15 years down the road.
- Estate Attorney – If you’re like many donors, you want to carry your legacy of giving over into your estate plan. A good estate attorney, working in tandem with your financial planner, will help you clearly quantify your must-haves (e.g., how much I need to leave my children for them to be financially secure?) so that you can be clear, intentional, and tax-savvy with your planned giving.
Not sure where to start with your charitable planning? We can help
Did you know that Advent Partners’ Certified Financial Planners specialize in helping generous-minded savers like you? Our comprehensive plans are designed to help you achieve long-term financial peace of mind while also amplifying your ability to do good for others.
Moreover, our unique Out of Office Advocacy approach means we proactively meet with your attorney, CPA, and other professional service providers to ensure that your entire team is aligned with your charitable giving and financial wellness goals. Schedule an introductory meeting with us today to learn how we can help you and your family stay ready for good.