“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, so fewer people are itemizing their taxes. However, there still are ways to donate to charity and get a reward.
Donor-advised funds. Your contributions are invested and grow tax-free, until you elect to donate to a qualified charity. Many of them have minimums to set up, as well as minimums on subsequent donations. Donations made to donor-advised funds are irrevocable. 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. This would let you itemize your deductions at tax time.
Rather than giving to charity each year, you can save your donations and give twice as much every other year. It’s called bunching. For instance, say that you donate $10,000 to charity every year. If you started bunching this holiday season, you’d wait a year to make that donation and take the standard deduction on your 2019 taxes. But in 2020, you’d donate $20,000 ($10,000 for 2019 and $10,000 for 2020) and itemize your taxes that year. You can also think about front-loading two years’ worth of donations and contributing to a donor-advised fund this year. Try to take as many itemized deductions as you can this year and take the standard deduction next year.
Even if you’re not thinking of itemizing, you can reduce your taxable income by using your Required Minimum Distributions (RMDs) to give to others. If you’re over 70½, your deadline to take distributions from your tax-deferred retirement accounts is likely the end of the year. You can transfer untaxed money directly from your IRA to a qualifying charity. Transfer the money directly to avoid paying taxes on the withdrawal.
Donating stocks, bonds, mutual funds or real estate can also be a beneficial tax strategy. You can donate appreciated investments, provided you’ve 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.
It’s a wise idea to think about charitable giving all year round, because it’s a useful tax strategy in retirement. Donating to local charities also helps your community.
Create a comprehensive written retirement plan that details all your expenses, including charitable giving. Lastly, stress test your nest egg before you make charitable donations to make certain that you’re not at risk of running out of money. Call (305) 443 - 3104 to set up an appointment to discuss whether your charitable giving strategy compliments your estate plan.
Reference: Kiplinger (November 25, 2019) “Strategies for Charitable Giving this Holiday Season”