By: Arash Navi, CPA, CFP®, Wealth Manager
America has been recognized as the most generous country in the last decade according to the Charities Aid Foundation’s World Giving Index.1 Charitable giving is deeply ingrained in American culture, reflecting the spirit of philanthropy and the desire to contribute to the greater good. Americans don’t just donate money to charities but 42% also volunteer their time to various organizations.2 Philanthropy does not just benefit the recipient; scientific evidence has shown that we become better humans by being philanthropic. The positive effects include greater overall happiness, lower stress level, better physical health, and improved sense of connection with others.3 Aside from these wonderful positive benefits, there are also various tax saving incentives to those who donate that can lower their tax bill and increase their ability to give.
Like any other aspect of the U.S. tax code, taking advantage of the tax breaks associated with charitable contributions can get complex. You can generally deduct charitable contributions, which reduces your taxable income, only if you itemize deductions on your federal income tax return. The deduction is currently limited to 60% of your adjusted gross income (AGI) for cash contributions to public charities. Otherwise, limits of 50%, 30%, or 20% of AGI may apply, depending on the type of property you give and the type of organization to which you contribute. (Note: Excess amounts can be carried over for up to five years.)
If you claim a charitable deduction for a contribution of cash, a check, or other monetary gift, you should maintain a record such as a cancelled check, a bank statement, or a receipt or letter from the charity showing the name of the charitable organization and the date and amount of the contribution. Donations of $250 or more must be substantiated with a contemporaneous written acknowledgment from the charity. Additional requirements apply to noncash contributions.
Below is an illustration that demonstrates many ways that an individual can contribute to charities, and I am going to discuss the three most common strategies for charitable contributions:
Giving Strategies
Bunch or time gifts and deductions
The Tax Cuts and Jobs Act (TCJA) roughly doubled the standard deduction beginning in 2018 and indexed it annually for inflation through 2025 ($13,850 for single taxpayers and $27,700 for joint filers in 2023). The result was a dramatic reduction in the number of taxpayers who itemize, now only about one out of ten.1
If you find that the total of your itemized deductions for 2023 will be slightly below the level of the standard deduction, it could be worthwhile to combine or “bunch” 2023 and 2024 charitable contributions into one year, itemize on your 2023 tax return, and take the standard deduction on 2024 taxes.
Another option is to increase your charitable giving in years when you expect higher annual income. For example, charitable deductions could help offset the tax liability resulting from a business sale, capital gains, stock options, or a Roth IRA conversion.
Utilize a donor-advised fund
Another way to bunch contributions or generate a large charitable deduction for the current year — possibly before you know where you want the money to go — is to open a charitable account called a donor-advised fund (DAF). Donors who itemize deductions on their federal income tax returns can write off DAF contributions in the year they are made, then gift funds later to the charities they want to support. DAF contributions are irrevocable, which means the donor gives the sponsor legal control while retaining advisory privileges with respect to the distribution of funds and the investment of assets. DAFs have fees and expenses that donors giving directly to a charity would not face. (Note: BFSG can assist you with opening a DAF.)
Donate from an IRA
If you are an IRA owner who is 70½ or older, you can give to charity without itemizing and still get a tax break through a qualified charitable distribution (QCD). A QCD must be an otherwise taxable distribution from an IRA (generally, distributions from traditional IRAs are subject to federal income tax). QCDs are excluded from income and won’t affect your tax obligation. Moreover, a QCD can satisfy all or part of your required minimum distribution. To make a QCD, you would direct your IRA trustee to issue a check made out to a qualified public charity. You may contribute up to $100,000 from your IRA; if you are married, your spouse may also contribute up to $100,000 from his or her IRA. Beginning in 2024, the QCD limit will be linked to inflation.
Here at BFSG, we recognize that each of our clients have their unique charitable goals and passion for causes including education, poverty, religion, and environmental conservation. We collaborate with our clients and their CPAs to make the most of their charitable giving and we incorporate it as part of their financial planning and tax planning strategies. If you are interested in learning more about these strategies, please Talk With Us!
Sources:
- Charities Aid Foundation (CAF). (October 2019). https://www.cafonline.org/docs/default-source/about-us-publications/caf_wgi_10th_edition_report_2712a_web_101019.pdf
- America the generous: U.S. leads globe in giving – Axios. (n.d.). https://www.axios.com/2022/03/09/america-charitable-giving-stats-ukraine
- What is a philanthropist? Fidelity Charitable. (n.d.). https://www.fidelitycharitable.org/guidance/philanthropy/what-is-a-philanthropist.html
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