Simple Techniques for Making Charitable Giving Tax-Efficient

Charitable giving is an integral part of many people’s lives. Whether it’s giving back to the community, supporting a cause close to their heart, or simply wanting to make a difference in the world, people are constantly seeking ways to give back. However, with tax season looming, it’s important to consider how your charitable donations can also benefit you financially. That’s where tax-efficient giving comes into play, allowing you to make a positive impact while also maximizing your tax benefits. In this article, we’ll explore some simple techniques for making charitable giving tax-efficient.

1. Consider a Donor-Advised Fund

A donor-advised fund (DAF) is a charitable giving account created by a nonprofit organization. It allows individuals to make tax-deductible contributions to the fund and then recommend grants from the fund to their preferred charities. This is an excellent option for those who want to donate to multiple charities while still receiving a tax benefit. DAFs also provide a more streamlined process for giving, as all donations can be made through one account.

How It Works

First, you would make a contribution to the DAF, which is then invested and grows tax-free. You can then recommend grants to be made from the fund to the charities of your choice. You can also choose to donate appreciated securities to the fund, which can provide you with a double tax benefit – a deduction for the fair market value of the securities and avoidance of capital gains tax on the appreciation.

2. Time Your Donations Strategically

Timing is critical when it comes to tax-efficient charitable giving. If you plan on making a substantial donation, it may be beneficial to time it in a year where your income is higher. This will allow you to claim a larger tax deduction and potentially lower your overall taxable income. Similarly, if you plan on making donations over a number of years, you may consider bundling them into one year to exceed the standard deduction threshold and receive a larger tax benefit.

Charitable Bunching

A popular strategy for timing donations is known as charitable bunching. It involves making a larger donation in one year and then skipping donations in the following year, effectively “bunching” your donations. This allows you to exceed the standard deduction in the year of the donation, while still being able to claim the standard deduction in the following year.

3. Donate Appreciated Assets

Another tax-efficient way to give back is by donating appreciated assets instead of cash. This can include stocks, real estate, or other assets that have increased in value. By donating appreciated assets, you can avoid capital gains tax on the appreciation while also receiving a tax deduction for the fair market value of the assets.

Qualified Charitable Distributions

If you’re over 70 ½ years old, you may also consider making a qualified charitable distribution (QCD) from your individual retirement account (IRA). This allows you to donate up to $100,000 directly to a charity, satisfying your required minimum distribution, without having to include it in your taxable income.

4. Do Your Research

Before making any donations, it’s important to do your research and ensure the charity you’re donating to is reputable and aligned with your values. You can do this by checking the charity’s website, reading reviews, and looking at their financials. It’s also a good idea to check if the charity is eligible to receive tax-deductible donations by using the IRS’s Exempt Organizations Select Check tool.

Tax ID Number

When it comes time to file your taxes, make sure to have the charity’s tax ID number (also known as an employer identification number or EIN). You’ll need this number to claim a tax deduction for your donation.

Conclusion

Charitable giving doesn’t have to be solely driven by the desire to do good. With a little planning and knowledge, you can also make it a financially beneficial decision. By utilizing techniques such as donor-advised funds, strategic timing, donating appreciated assets, and doing your research, you can make your charitable giving tax-efficient and make an even bigger impact in the world.