The holidays are a popular time of year to give to charity. We are in a good mood, feeling generous and may also be looking for ways to lower our taxable income before the end of the year. However, this incentive only applies if you itemize your deductions.
The Tax Cuts and Jobs Act nearly doubled the standard deduction, and as a result, fewer people are itemizing their taxes. However, there are ways to donate to charity and still reap a reward.
Donor-Advised Funds
Donor-advised funds are growing quickly in popularity. Contributions totaled more than $37 billion last year, and there has been an 86% increase in donor-advised fund contributions over the past five years. Your contributions are invested and grow tax-free until you choose to donate to a qualified charity.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
There are some considerations with donor-advised funds; many have minimums to set up as well as minimums on subsequent donations. Donations made to donor-advised funds are irrevocable. You’ll also want to keep an eye on the fees you’re being charged. Depending on your situation, a donor-advised fund could help you exceed the standard deduction, which is $12,200 for single filers or $24,400 for married couples filing jointly, allowing you to itemize your deductions at tax time.
Bunching
Instead of giving to charity every year, you can save your donations and give twice as much every other year. For example, let’s say you donate $10,000 to charity every year. If you started bunching this holiday season, you would wait to make that donation and take the standard deduction on your 2019 taxes. Then in 2020, you would donate $20,000 ($10,000 for 2019 and the $10,000 for 2020) and itemize your taxes that year.
Bunching may or may not work for your personal situation, depending on how much you plan to donate and how close you are to having enough deductions to exceed the threshold for the standard deduction. This strategy may also play in your favor if you’re donating to a donor-advised fund. Consider front-loading two years’ worth of donations and contributing to a donor-advised fund this year. Take as many itemized deductions as you can this year, and take the standard deduction next year.
Required Minimum Distributions
Even if you’re not planning to itemize your taxes, you can reduce your taxable income by using your required minimum distributions, or RMDs, to give to others. If you’re over the age of 70½, your deadline to take distributions from your tax-deferred retirement accounts is likely the end of the year. You can transfer untaxed money straight from your IRA to a qualifying charity, including non-profits and religious organizations. It’s better to transfer the money directly to avoid paying taxes on the withdrawal; if you withdraw the money first and then write a check to a charity, you will owe the IRS.
A reminder for retirees: Whether you use your RMDs for charitable giving or something else, do not forget to take them! If you miss your deadline, you could get hit with a 50% penalty on the amount you should have withdrawn. Talk to your financial adviser to determine how much you need to withdraw and your deadline, or consider trying an easy online calculator, like this one.
Donating Stock
Donating stocks, bonds, mutual funds or real estate can be a beneficial tax strategy. You can donate appreciated investments as long as you have owned them for more than a year. When you donate appreciated investments directly to a charity, you avoid having to report the gains as taxable income. The tax benefits can really add up, especially if the donation is worth $1,000 or more. Again, be sure to consult your tax professional and financial adviser before donating stock to charity.
No matter the time of year, I encourage my clients to think about charitable giving all year round. Not only is it a useful tax strategy in retirement, but donating to charity also helps your community. You should have a comprehensive written retirement plan that spells out all of your expenses, including charitable giving. And, finally, it’s a good idea to stress test your nest egg before you make charitable donations to make sure you are not at risk of running out of money.
-
Stock Market Today: Stocks Are Mixed Before Liberation DayMarkets look forward to what comes with the reordering of 80-year-old global trade relationships.
-
Stagflation: What It Is and Why Retirees Should CareStagflation — the economic bogeyman of the 1970's — may return to the US. Here's what it could mean to your retirement.
-
What Can a Donor-Advised Fund Do for You? (A Lot)DAFs and private foundations go about helping charities (and those who donate) in different ways. Each comes with its own benefits and restrictions to navigate.
-
Estate Planning When You Have International AssetsEstate planning gets tricky when you have assets and/or beneficiaries outside the U.S. To avoid costly inheritance mistakes, it pays to understand the basics.
-
Retiring With a Pension? Four Things to KnowThe road to a secure retirement is slightly more intricate for people with pensions. Here are four key issues to consider to make the most out of yours.
-
How to Teach Your Kids About the Tax Facts of LifeTaxes are unavoidable, so it's important to teach children what to expect. Also, does your child need to file a tax return for 2024? Find out here.
-
Tax Advantages of Oil and Gas Investments: What You Need to KnowTax incentives allow for deductions and potential tax-free earnings — benefits accessible only to accredited investors in small producer projects.
-
Charitable Contributions: Five Frequently Asked QuestionsMake the most of your good intentions by understanding the ins and outs of charitable giving. A good starting point is knowing what's deductible and what isn't.
-
Taxes in Retirement: What ESOP Participants Need to KnowMost Employee Stock Ownership Plans (ESOP) participants transfer company stock to an IRA starting around age 55, so taxes on that money have been deferred.
-
How Roth Accounts Can Ease Your Tax Burden in RetirementStrategic Roth IRA conversions can set you up for tax-free income in retirement and a tax-free inheritance for the people you love.
