As the days grow shorter and we enter the final stretch of the year, many people begin to think about the causes they want to support with their year-end charitable giving. Some people have an annual giving budget they want to reach, while others respond to end-of-year mailings, fundraisers, or other outreach from local organizations. One estimate suggests that 30% of annual giving in the US occurs in the month of December, with a whopping 10% of annual giving in the last 3 days of the year.[1]
There are many benefits to charitable giving, from personal fulfillment to promoting an important cause. In addition to this, there may also be tax benefits to certain kinds of giving. While the end of the calendar year is itself a motivating deadline, it is also the end of the tax year for most people. This means that December 31st is the last opportunity to get the tax benefits of a donation in this tax year.
What is Deductible?
Donations made to qualifying charities – such as nonprofits, religious or educational organizations, or foundations – are generally deductible if you itemize deductions on your tax return. This means that the IRS allows you to reduce your taxable income by the amount of your charitable giving, lowering your current year’s tax bill. Although charitable contributions are tax deductible, other common forms of giving are not, including political donations and gifts to family members.
While the tax deduction is a meaningful benefit of charitable giving, it’s generally not worthwhile to give solely for the purpose of lowering taxes. From a purely financial perspective, you’re better off keeping the money and paying taxes than donating the money and not paying taxes. For the charitably inclined, however, there are ways to structure your charitable giving to maximize these tax benefits.
Common Ways To Give
Nothing in the tax code is simple, and charitable contributions are no exception. The tax benefit you get from a charitable contribution depends on various factors, including your total income, whether you’re itemizing deductions, the type of organization you’re giving to, and even the way you make the gift. The three most common methods of charitable giving are the following:
- Cash donations are the most straightforward way to give. You can write a check, use your credit card or Venmo, or if you’re feeling especially 20th century, even give dollar bills. Cash donations are deductible up to 60% of your adjusted gross income (AGI), and they are generally most useful for smaller donations or when you’re not itemizing and don’t need to keep track of receipts.
- In-kind gifts are the second method of giving, and from a tax perspective, they can be far more impactful than cash gifts. Giving “in-kind” means that you give something other than cash, such as donating clothes to Goodwill, or giving canned goods to a food kitchen. In-kind gifts also include donations in the form of appreciated assets such as stocks or bonds (or sometimes much more esoteric things). These gifts are deductible up to 30% of your AGI, and importantly, if you give appreciated assets, you can also avoid paying tax on any capital gain. This double tax benefit can be valuable, but giving appreciated assets is more complicated than cash, and it’s not always possible.
- Qualified charitable distributions (QCDs) are another option for giving, available to anyone over age 70.5 who has money in an IRA. QCDs are distributions made from an IRA directly to a qualified charity. These distributions, which are limited to $105,000 in 2024, are excluded from your income entirely. QCDs can be particularly useful for people who have required minimum distributions because they count toward satisfying the RMD. It is important to keep track of any QCDs and report them to your tax preparer, since year-end tax forms do not differentiate them from regular distributions.
Longer-Term Tax Strategy
Charitable deductions are more valuable when your income is higher than when it is lower. Because of this, it’s ideal to donate more money in high-income years, but you may not want to, or be ready to, give a higher amount in that year. Enter the donor-advised fund.
A donor-advised fund (DAF) is an investment account specifically for charitable giving. When you contribute money, it’s an irrevocable gift to a public foundation (i.e., a qualifying charity), and that foundation then allows you to “advise” how they grant the money out to other organizations. DAFs generally only require you to give away a portion of the balance in a single calendar year, and any money that isn’t granted can be invested.
Importantly, the initial donation to a DAF creates a tax deduction, while subsequent grants complete the giving to the causes you want to support. This separation creates a planning opportunity to pre-fund multiple years of charitable giving during a high-income year in order to maximize the tax benefits. Beyond this, DAFs also have logistical advantages that can help simplify the accounting for your charitable giving and even create a charitable legacy for your heirs. For more information on DAFs, see our prior article titled Donor Advised Funds.
While we have focused on DAFs, there are other approaches that can support a longer-term vision of charitable giving. Some examples include charitable trusts, charitable gift annuities, and legacy pledges, with each having its own particular features and tax implications.
Good Planning Supports Giving
Whether you’re motivated by a passion for a particular cause, a desire to give back to the community, or you want to support a loved one’s passion or cause, charitable giving is a way that many of our clients choose to have an impact in areas that are important to them. We routinely work with clients and their tax preparers to develop a strategic, and realistic, giving plan that aligns with their goals.
No matter how much you give, careful planning can ensure that you’re achieving the impact you want while optimizing the tax benefits of your giving.
