Charitable Giving: Smart Strategies to Boost Tax Deductions

Charitable giving is more than just a noble act; it’s a strategic financial tool that, when leveraged correctly, can significantly reduce total tax burden

For many philanthropists, the decision to donate often originates from a genuine desire to help worthy causes achieve their mission and make a positive impact in the world. However, there’s also a third potential benefit to this spirit of altruism during tax season. When approached strategically, charitable giving can also deliver substantial tax deductions and benefits.  

The good news is that charitable giving helps people reap financial rewards for actions they are likely already taking. U.S. taxpayers have a long-proven track record of philanthropic donations. A 2023 report revealed that individuals gave an estimated $319.04 billion in 2022, making up 64% of total charitable giving and reaching almost $1 billion in donations daily. Unfortunately, many taxpayers aren’t aware that charitable giving can impact their total tax deductions. In fact, according to Investopedia, qualifying charitable donations are one of the most overlooked tax deductions every year. As a result, countless taxpayers miss out on this potentially lucrative financial benefit altogether. 

Recent legislative changes have also impacted the tax process for many philanthropic Americans. The Tax Cuts and Jobs Act (TCJA) significantly reformed U.S. tax law, including the regulations surrounding eligible charitable giving and associated tax deductions. One of the biggest changes under the TCJA was the near doubling of the standard deduction.

For individuals and married couples, TCJA legislation increased the standard deduction from $6,350 and $12,700 in 2017 to $12,000 and $24,000 in 2018 — a trend that continued in subsequent years based on inflation. The 2023 standard deduction is: 

  • $13,850 for single filers and those married filing separately
  • $27,700 for those married filing jointly
  • $20,800 for heads of household

The increased standard deduction makes it more challenging for some to reach the threshold and less advantageous for some taxpayers to itemize their deductions, including any charitable contributions they may have made throughout the year. 

Know The Tax Benefits of Qualifying Charitable Donations 

Understanding the tax benefits of charitable giving can help both taxpayers and financial advisors employ donation strategies that do good in the world and minimize the overall tax burden for the ultimate financial win/win. Current legislation outlines that donating cash to an IRS-qualified 501(c)(3) typically allows a tax reduction of up to 60% of adjusted gross income.

Beyond cash contributions, donating appreciated assets you’ve held for over a year, such as long-term appreciated stocks or property, can also provide significant tax benefits. The IRS allows you to deduct these non-cash contributions based on their full fair market value, up to 30% of your adjusted gross income. By strategically combining contributions of appreciated assets along with cash gifts, you can maximize the total amount you can claim as a charitable tax deduction. 

Whether donating cash or appreciated assets, it’s crucial to keep accurate records of all donations. This includes receipts, canceled checks, or bank statements for cash contributions, as well as written acknowledgments from the organization for non-cash donations over $250.

Ensure Charitable Giving Qualifies For Tax Deductions 

When building your donation strategy, It’s important to note that not all charitable giving is created equal in the eyes of the IRS. To claim a deduction, your contributions must go to organizations recognized as tax-exempt by the IRS, such as religious organizations, educational institutions, and certain charitable organizations. A qualified charitable organization is one that meets specific IRS criteria, allowing donors to claim tax deductions for their contributions. 

The distinction of being a qualified charity under the IRS standards primarily means the organization adheres to regulations that govern entities receiving tax-deductible charitable contributions. Not quite sure where your charitable giving lands? The IRS provides an online search tool, Tax Exempt Organization Search (TEOS), where you can verify an organization’s eligibility status. Additionally, most qualified charities should provide a tax ID number upon request, which you’ll need to substantiate your deduction. Typically, deductions need to be itemized using Schedule A (Form 1040) to claim a deduction for a charitable contribution.

Donate Smarter: Taking a Strategic Approach to Charitable Giving 

To maximize the tax benefits of charitable giving, it’s crucial to adopt a strategic approach that aligns with your overall financial plan. Here are some effective donation strategies to consider:

Donor-Advised Funds (DAFs) 

A donor-advised fund is a charitable investment account that allows you to make tax-deductible contributions, grow the funds tax-free, and recommend grants to qualified charities over time. Other advantages to DAFs include the ability to claim the full tax deduction in the year the contribution is made, even if the funds are distributed to charities in subsequent years. Additionally, DAFs can accept non-cash assets, such as appreciated stocks or real estate, allowing you to avoid capital gains taxes while maximizing your deduction. For donors seeking flexibility, ease of administration, and immediate tax advantages, DAFs offer a viable approach.

Qualified Charitable Distributions From Individual Retirement Accounts

The IRS allows individuals aged 70.5 and older to make Qualified Charitable Distributions (QCDs) from Individual Retirement Accounts (IRAs) as a tax-efficient way to support their chosen courses. QCDs allow you to transfer up to $100,000 annually from your IRA directly to qualified charitable organizations, satisfying your required minimum distribution (RMD) without increasing your taxable income. It’s important to note that QCDs are not deductible as charitable contributions on Schedule A. Instead, donors must obtain a written acknowledgment of the donation from the charitable organization before filing their return. 

Gifting Appreciated Assets 

As already mentioned, one of the most efficient donation strategies is gifting appreciated assets, such as stocks or real estate to qualified charities. Gifting appreciated assets allows individuals to avoid paying capital gains taxes on the increase in value of the securities since purchase, and donors can still claim a tax deduction for the full current market value of the asset at the time of donation. 

Bunching (or Bundling) Charitable Donations

There is a silver lining for taxpayers struggling to reach the increased standard deduction outlined in the TCJA. If itemized deductions, including charitable giving, fall below the standard deduction threshold in any given year, taxpayers may consider “bunching” or “bundling” contributions. Bunching involves combining multiple years’ worth of charitable giving into a single tax year. By concentrating multiple years of donations, taxpayers are able to exceed the minimum standard deduction for maximum tax benefits. This strategy can be particularly powerful when combined with the use of a donor-advised fund (DAF) and the donation of appreciated securities. The goal is to itemize deductions in the years when contributions are bunched and donated to the DAF, potentially exceeding the standard deduction threshold. In subsequent years, taxpayers can claim the standard deduction while still making charitable distributions from their DAF account. 

Charitable Remainder Trusts

A Charitable Remainder Trust (CRT) is an irrevocable trust that allows donations of appreciated assets, such as stocks or real estate, to the trust. The trust then sells the assets tax-free and provides an income stream for a specified period or for life. Upon the termination of the trust, the remaining assets are distributed to one or more qualified charities.

Create a Giving Strategy that Maximizes Financial Benefit

Charitable giving is both a noble pursuit and an effective tax planning strategy to optimize financial benefits. Understanding the nuance of qualified organizations, eligible donation types, and record-keeping requirements can help ensure that your generosity brings with it maximized tax deductions.

When creating your donation strategies, it’s important to remember that every situation is unique. Consulting with a qualified tax professional and your CERTIFIED FINANCIAL PLANNER(™) practitioner before donating offers the best way to successfully navigate the complexities of charitable giving and tax planning.  

Schedule a Call With Our Team of Financial Professionals

Successful financial planning must include tax planning to drive final ROI. Ready to take the first step toward creating a tax-efficient charitable giving strategy that supports your philanthropic goals and optimizes financial benefit? Schedule a consultation with our financial planning experts today and discover how strategic planning can amplify the impact of your generosity while potentially reducing your overall tax burden.

In the meantime, keep an eye out for our next installment in the 3 No-Regret Tax Planning Strategies series: Charitable Giving.