taxes

Strategies for Charitable Giving this Holiday Season

Four ways to support your favorite charities that fit into a smart tax-planning strategy.

The holidays are a popular time of year to give to charity. We are in a good mood, feeling generous and may also be looking for ways to lower our taxable income before the end of the year. However, this incentive only applies if you itemize your deductions.

The Tax Cuts and Jobs Act nearly doubled the standard deduction, and as a result, fewer people are itemizing their taxes. However, there are ways to donate to charity and still reap a reward.

Donor-Advised Funds

Donor-advised funds are growing quickly in popularity. Contributions totaled more than $37 billion last year, and there has been an 86% increase in donor-advised fund contributions over the past five years. Your contributions are invested and grow tax-free until you choose to donate to a qualified charity.

There are some considerations with donor-advised funds; many have minimums to set up as well as minimums on subsequent donations. Donations made to donor-advised funds are irrevocable. You’ll also want to keep an eye on the fees you’re being charged. Depending on your situation, a donor-advised fund could help you exceed the standard deduction, which is $12,200 for single filers or $24,400 for married couples filing jointly, allowing you to itemize your deductions at tax time.

Bunching

Instead of giving to charity every year, you can save your donations and give twice as much every other year. For example, let’s say you donate $10,000 to charity every year. If you started bunching this holiday season, you would wait to make that donation and take the standard deduction on your 2019 taxes. Then in 2020, you would donate $20,000 ($10,000 for 2019 and the $10,000 for 2020) and itemize your taxes that year.

Bunching may or may not work for your personal situation, depending on how much you plan to donate and how close you are to having enough deductions to exceed the threshold for the standard deduction. This strategy may also play in your favor if you’re donating to a donor-advised fund. Consider front-loading two years’ worth of donations and contributing to a donor-advised fund this year. Take as many itemized deductions as you can this year, and take the standard deduction next year.

Required Minimum Distributions

Even if you’re not planning to itemize your taxes, you can reduce your taxable income by using your required minimum distributions, or RMDs, to give to others. If you’re over the age of 70½, your deadline to take distributions from your tax-deferred retirement accounts is likely the end of the year. You can transfer untaxed money straight from your IRA to a qualifying charity, including non-profits and religious organizations. It’s better to transfer the money directly to avoid paying taxes on the withdrawal; if you withdraw the money first and then write a check to a charity, you will owe the IRS.

A reminder for retirees: Whether you use your RMDs for charitable giving or something else, do not forget to take them! If you miss your deadline, you could get hit with a 50% penalty on the amount you should have withdrawn. Talk to your financial adviser to determine how much you need to withdraw and your deadline, or consider trying an easy online calculator, like this one.

Donating Stock

Donating stocks, bonds, mutual funds or real estate can be a beneficial tax strategy. You can donate appreciated investments as long as you have owned them for more than a year. When you donate appreciated investments directly to a charity, you avoid having to report the gains as taxable income. The tax benefits can really add up, especially if the donation is worth $1,000 or more. Again, be sure to consult your tax professional and financial adviser before donating stock to charity.

No matter the time of year, I encourage my clients to think about charitable giving all year round. Not only is it a useful tax strategy in retirement, but donating to charity also helps your community. You should have a comprehensive written retirement plan that spells out all of your expenses, including charitable giving. And, finally, it’s a good idea to stress test your nest egg before you make charitable donations to make sure you are not at risk of running out of money.

About the Author

Tony Drake, CFP®, Investment Advisor Representative

Founder & CEO, Drake and Associates

Tony Drake is a CERTIFIED FINANCIAL PLANNER™and the founder and CEO of Drake & Associates in Waukesha, Wis. Tony is an Investment Adviser Representative and has helped clients prepare for retirement for more than a decade. He hosts The Retirement Ready Radio Show on WTMJ Radio each week and is featured regularly on TV stations in Milwaukee. Tony is passionate about building strong relationships with his clients so he can help them build a strong plan for their retirement.

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