Charitable Donations: Strategies for Tax-Efficient Giving

Donating to charity can be a fulfilling lifelong practice, supporting causes in which we believe can make an impact on lives beyond our own. Showing generosity through giving acknowledges the belief that we have ‘enough’ and are fortunate enough to share our wealth with others. Gifts are not limited to financial capital, but may also be donated through the giving of our time, talents, and shared knowledge.

“No one has ever become poor by giving.” – Anne Frank, “The Diary of Anne Frank”

Though most of us give to charities without expecting anything in return, there are potential tax benefits for giving to qualifying Section 501(c)(3) organizations. The U.S. federal government has been expanding charitable deductions since 1917 (when top wartime tax rates were at 67%), and these gifts can be in the form of cash, securities, or other property. Notice that giving of one’s time or services is not tax-deductible, but is nonetheless valuable!

This article focuses on tax-efficient methods for donating to charity, allowing even more of your wealth to be directed toward your desired causes.

First – a quick note about standard vs. itemized deductions:

In determining taxable income, taxpayers can claim deductions to adjusted gross income (AGI) by claiming either standard or itemized deductions. These deductions provide tax relief and can eliminate filing requirements for low-income earners. The standard deduction is determined by the taxpayer’s filing status, age, and if they are blind. On the other hand, a taxpayer can ‘itemize’ deductions to see if they can manually exceed the standard deduction for an additional reduction of taxable income. Common itemized deductions include medical expenses, state & local taxes (SALT), mortgage interest, and charitable contributions. Each of the itemized deductions has its own thresholds and rules.

The Tax Cuts and Jobs Act of 2017 (TCJA) changed taxpayers’ annual standard deduction amounts, nearly doubling the previous 2017 limits. This change has made it more difficult for households to exceed the standard deduction and receive any additional tax benefits for charitable giving.

For example, a couple under age 65 filing jointly in 2020 would have to exceed $24,800 in itemized deductions (Schedule A) to receive any additional tax benefits for gifting. An estimated 90% of taxpayers do not itemize their deductions, but I will later mention an opportunity to exceed the standard deduction.

What can I give and deduct? “

Depending on the type of property donated and the type of charitable organization (public or private), there are limitations on the percentage of income a taxpayer can deduct.

Cash & Ordinary Income Property

Donating cash to public and government charities can receive a tax deduction of up to 60% of AGI, while deductible donations to private non-operating foundations are limited to 30% of AGI. This percentage is increased to 100% of AGI for cash gifts to public and government charities in 2020 and 2021 due to the Coronavirus Aid, Relief and Economic Security (CARES) Act. A $300 deduction ($600 if filing jointly) is also available for cash gifts in 2021, even if claiming the standard deduction.

You aren’t limited to giving cash! You can also donate stock, mutual fund shares, real estate, and tangible personal property – these are called ‘capital assets.’ Be careful only to donate property that has unrealized gains, not losses. If you want to gift something at a loss, it is better from a tax perspective to sell it, realize a deductible capital loss, then give the cash proceeds.

Short-Term Capital Gain Property

Capital assets held for one year or less can be donated to public and government charities, receiving a tax deduction of up to 50% of AGI. Deductible donations to private non-operating foundations are limited to 30% of AGI.

Long-Term Capital Gain Property

Capital assets held for longer than one year can be donated to public and government charities, receiving a tax deduction of up to 30% of AGI. Deductible donations to private non-operating foundations are limited to 20% of AGI. For example, suppose you have owned Apple stock since the first iPhone was released (nice pick!). In that case, you may want to gift the shares directly to charity to eliminate a large amount of taxable earnings and also receive a tax deduction.

If gift amounts exceed the AGI limits, the taxpayer can carry over the excess for five years, to be used up as a future itemized deduction. Consult a tax professional to ensure that your gifts are appropriately categorized and tracked.

But what if I don’t gift enough to itemize my deductions? “

Donor Advised Fund (DAF)

If your itemized deductions do not exceed your standard deduction for the year, you should consider opening a donor-advised fund (DAF). These accounts provide a unique way to ‘stack’ future charitable contributions into one tax year for deduction purposes. You can make an irrevocable gift to this ‘centralized charitable account,’ receive an immediate deduction, then direct donations from the DAF to the desired charities in future years. For example, I could donate $30,000 of appreciated stock to a DAF, receive the tax deduction this year (since my itemized deductions are now higher than the standard deduction), and direct my donations to numerous charities over the next few years. Large custodians such as Schwab, Vanguard, and Fidelity offer these accounts with low costs and easy distribution to charities. These gifts can also be donated anonymously.

Qualified Charitable Distributions (QCDs)

IRA account owners (non-inherited) over age 70 1/2 can directly transfer up to $100,000 each year/per person to qualified charities. By sending the money from a traditional IRA to the charity instead of coming to the owner first, none of the distributed amounts are taxable. These gifts can not be included in your itemized deductions (no double-dipping). Many retirees receive required minimum distributions (RMDs) from IRAs as taxable income then send the money to charity, but there is a better way! Keep QCDs in mind if you or someone you know is age 70 1/2 or older this year and unable to itemize deductions.

Here is a visual representation of how funds from the IRA bypass taxation using this method:

I hope this information is valuable to you and helps you consider tax efficiency as you give to your favorite charities in the coming years. As this information relates to income taxation, I recommend that you measure twice and consult a tax professional before taking action. Tax legislation changes often, and these concepts may or may not apply to your personal financial landscape. Also, maintain proper documentation of your charitable contributions; ask for a receipt if you plan to itemize!

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