Americans are notoriously generous when it comes to charitable giving. According to Giving USA, Americans gave $484.85 billion to charity in 2021, a 4 percent increase from 2020. The end of the year is the most popular time to give to charity, with 30 percent of annual giving occurring in the month of December, and a full 10 percent of donations made during the last three days of the year.
If you’re planning on making a charitable donation before the end of the year, it’s important to be aware of the following.
Cash isn’t always the most efficient option.
If you’re used to writing a check each year to your favorite charity, you may want to reconsider. Contributing appreciated securities, such as stocks, bonds, or mutual funds, can be a great way to both maximize your donation and lower your tax liabilities for the year. Selling stock to make a donation could trigger capital gains taxes, assuming the value of the stock has grown since you acquired it. On the other hand, if you transfer the appreciated stock in kind to the organization, you’d avoid triggering a taxable event, and the charity would receive the entire value of the stock. Because charitable organizations are tax-exempt, the charity could then sell the stock without triggering a taxable event. That’s a win-win for both you and your charity.
You may not want to give every year.
Following tax law changes that went into effect as part of the 2017 Tax Cuts and Jobs Act (TCJA), fewer taxpayers now have an incentive to itemize. And, because you must itemize in order to claim a charitable deduction, fewer individuals are eligible to receive end-of-year tax benefits for donating to charity.
So, how can you reap the benefits of donating to charity if you don’t currently itemize? One option is to use a bunching strategy. Instead of making a charitable donation every year, it may make sense to save up several years’ worth of donations and contribute them all at once.
For example, if you typically donate $4,000 per year to charities, it may make sense to instead “bunch up” those contributions and donate $20,000 every five years. The key is to make sure you donate an amount high enough that itemizing your taxes makes sense.
Your RMD can actually lower your tax liability for the year.
Many retirees dread taking required minimum distributions (RMDs) from their tax-deferred retirement accounts each year because RMDs are taxed as ordinary income. This increase in taxable income can cause you to fall into a higher tax bracket, increase your Medicare premiums, and even increase the taxable amount of your Social Security income benefits.
However, if you’re a charitably minded individual over age 70.5, you may be eligible to contribute up to $100,000 from your retirement account directly to a charity without increasing your taxable income. This type of distribution is called a qualified charitable distribution (QCD). As with many gifting strategies, there are specific requirements you must follow to ensure your RMD donation qualifies as a QCD, so consult your wealth manager for assistance.
You can make a charitable gift without designating an organization right away.
Ready to make a charitable donation but unsure what organization(s) you’d like to support? No problem. A donor-advised fund (DAF) is a great option for individuals seeking both tax benefits and control over future donations. A DAF is a 501(c)(3) charitable fund that can receive irrevocable charitable gifts from you (as the donor), and you retain control over both the timing of distributions and the organizations to which donations are made.
As with most financial planning strategies, the charitable giving strategy that’s right for you depends on multiple factors, including your age, your current financial situation, your taxable income, your goals for the future, and more.
Gene Gard, CFA, CFP, CFT-I, is a Private Wealth Manager and Partner with Creative Planning. Creative Planning is one of the nation’s largest registered investment advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.