Three Ways to Make the Most of Your Year-End Giving

The season of giving is here, and it can go beyond just gifts. This is the perfect time to give back and consider a charitable donation.

But, with many Americans struggling with their finances in the midst of lingering inflation, how can we stay on budget and still give back? After two record-setting years, charitable giving decreased in 2022, so nonprofits need help now more than ever.

Before you give to charity, find a cause that is important to you. You shouldn't donate simply because you want a tax write-off. Instead, find a charity that means something to you or your loved ones. Whether it’s a local animal shelter or the American Red Cross, there are many organizations that could use your help.

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There are a number of ways to give, some of which can be more effective than others. By understanding how to maximize your charitable donations, you can make the most out of your gifts while staying on budget and helping the causes you are passionate about.

1. Take advantage of tax benefits

If you have a good strategy for your donations, you can save more on your taxes, which will give you the ability to donate even more to charity. To encourage charitable giving, the IRS offers many tax deductions for donations made throughout the year. However, to claim these deductions you need to have the right paperwork and have it filed correctly.

If you are seeking a tax deduction, you need to make sure your donation falls under the IRS’s definition of a charitable donation. You can donate to organizations that are registered as tax-exempt, including places like churches and religious operations or museums and educational organizations. Be careful. Not all nonprofits are tax-exempt, so make sure you do your homework before you choose.

Different regulations apply to different types of donations, including money or other assets. For example, if you donate clothes to a local Goodwill, you can deduct only the value that Goodwill can get from selling those items. You cannot deduct what you originally paid for them.

In most cases, you can donate up to 50% of your adjusted gross income, but 20% or 30% limitations may apply in different scenarios.

2. Bunch your contributions

Once you choose your charity, decide how often you are going to donate. While you may want to donate every holiday season, it might make more sense financially to give twice as much every other year. This strategy is commonly referred to as “bunching.” Rather than making yearly donations, combine two or more years of contributions into one tax year to increase your itemized deductions for that year so you can surpass the itemization threshold. Then, on your off years, take the standard deduction.

If you use the bunching strategy and want the tax benefit of itemizing, the amount you donate, along with your other tax deductions, must be greater than the standard deduction for 2023, which is $13,850 for single people and $27,700 for married couples. With this higher standard deduction, I recommend everyone consider bunching donations to take advantage of itemizing.

3. Use qualified charitable distributions

If you turned 73 this year, you have until next April to begin taking your required minimum distribution (RMDs). A way to meet your annual RMD is by using a qualified charitable distribution (QCD). This allows those age 70 ½ and older to make donations of up to $100,000 from their IRA. When you make a distribution from your IRA, those are pre-taxed dollars and can be used to meet your annual RMD. This will reduce your adjusted gross income and can go directly to charity without being taxed when you withdraw.

If you don’t have it in your budget to donate this year, that’s OK! There are still other ways you can give back, like volunteering at your favorite organization. If you are worried about how your donation could affect your finances, I recommend working with a financial professional. They can help you determine the best ways to maximize your donation while still staying within your budget.

Drake & Associates is an independent investment advisory firm registered with the U.S. Securities & Exchange Commission. This is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may view this report. Neither the information nor any opinion expressed it so be construed as solicitation to buy or sell a security of personalized investment, tax, or legal advice. The information cited is believed to be from reliable sources, Drake & Associates assumes no obligation to update this information, or to advise on further development relating to it. Past performance is not indicative of future results.

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