How Best to Give Back: Tax-Efficient Ways to Donate to Charity

When we discuss with clients their financial goals, they often wish to include in their financial plan some level of charitable giving.  Many academic studies have demonstrated the increased satisfaction and joy that comes with being generous, and, of course, the potential tax breaks from donations to charity don’t hurt either.  In this article, we discuss strategies for maximizing deductions under the new tax law, including the use of Donor Advised Funds and Qualified Charitable Distributions.

Maximizing Deductions for Charitable Giving Under the New Tax Law. The new tax law nearly doubled the standard deduction last year, so many Americans who itemized deductions prior to 2018 are now taking the standard deduction instead.  In 2019, the standard deduction is $12,200 for single filers and $24,400 for married filing jointly.  Depending on the level of your other itemized deductions (e.g. for mortgage interest, state and property taxes, medical expenses), you may now want to bunch charitable giving into certain tax years and take the standard deduction in the off years.  For example, if a couple normally gives $15,000 per year to charity, they could plan instead to give $30,000 in 2019 (in order to benefit from itemizing deductions), then not give anything in 2020 and take the standard deduction instead.

Donor Advised Funds.  If you have appreciated securities (i.e. investments that have grown a lot since you purchased them) in a taxable account, you may want to facilitate tax-efficient charitable giving by establishing a donor-advised fund (DAF).  In this case, investors donate securities to a DAF and then “advise” that the DAF give grants to their favorite charities.  Investors can deduct on their taxes the fair market value of the securities at the time that they donated them to the DAF, avoid paying capital gains tax on the appreciation, and choose when to distribute funds from the DAF (giving from the DAF does not have to take place in the same tax year as the contributions).

Qualified Charitable Distributions.  If you are over age 70 ½, another potential vehicle for charitable giving is qualified charitable distributions (QCDs).  Instead of paying ordinary income tax on the required minimum distributions (RMDs) from your retirement accounts and then giving to charity, you can make donations to charities directly from your IRA.  If done correctly, the donation amount will be excluded from your adjusted gross income but will still count toward fulfilling your RMD.  Especially since fewer taxpayers will be itemizing deductions (including charitable giving) under the new tax law, QCDs might be a more tax-efficient way to give for those over age 70 ½.  You cannot itemize charitable giving done through QCDs, and the gifts must be transferred directly to a charity from one’s IRA, not through a Donor Advised Fund or private foundation (no double dipping on tax breaks!).  The limit on QCDs is $100k per year, but for most investors, that constraint is not a problem.

Being strategic in how you structure your charitable giving could generate significant tax savings each year.  We have helped many clients to utilize these strategies and seen the advantages firsthand.  With the new tax law in place, now is the perfect time to consider your giving strategy, so give us a call to see if any of these options would be beneficial for you.