As year-end nears, many think of ways to maximize their charitable donations and reduce their taxable income for the year. The following are several strategies to help minimize your taxes and maximize your impact.
#1 – “Bunch” your donations
If you don’t file an itemized income tax return (i.e., you take the standard deduction), you won’t be eligible to deduct charitable donations from your taxable income. Fortunately, you can still reap the tax benefits of donating to charity by “bunching” multiple years of donations into a single, large contribution.
For example, if you typically donate $4,000 per year to charities, it may make sense to instead “bunch up” those contributions and donate $20,000 every five years. The key is to make sure you donate an amount high enough to have your total itemized deductions (charitable gifts, mortgage interest and state and local taxes) exceed the standard deduction for your filing status. Doing so allows you to itemize in the “bunching” year and claim the full deduction. Keep in mind that with the changes coming from the One Big Beautiful Bill Act, the standard deduction has gotten much larger for those over 65.
#2 – Think beyond cash
Instead of donating cash, it may be more impactful and tax-efficient to make an in-kind donation of appreciated securities, such as stocks, bonds or mutual funds.
For example, let’s say you decide to donate $2,000 in appreciated stock to charity. Your cost basis for the stock is $400. If you sell the stock for $2,000 and donate the proceeds, you’ll owe capital gains taxes on the $1,600 gain. At a 15% capital gains tax rate, that means you’ll need to pay $240 in taxes following the sale, and $1,760 will be left to donate to the charity. You’d be eligible to deduct $1,760 in charitable donations on your itemized tax return.
On the other hand, if you were to make an in-kind transfer of the appreciated stock directly to the organization, the charity would receive the entire $2,000 value of the stock. Because charitable organizations are tax-exempt, the charity could then sell the stock without paying taxes on the transaction. As a result, you could claim a charitable deduction of $2,000 on your itemized tax return, and the charity would receive the full $2,000 market value of the stock.
#3 – Contribute to a donor-advised fund
A DAF is a 501(c)(3) charitable fund that holds irrevocable charitable gifts. As the donor, you retain control over the timing of charitable distributions and the qualified charitable organizations to which donations are made.
A great benefit of establishing a DAF is that you can make a single large contribution of cash, securities or other assets (including complex assets, such as ownership in a business or real estate) during a year in which your income is higher than normal, then distribute assets to charities over several years. This can be an especially effective way to lower your taxable income during years in which you experience a large taxable event, such as a bonus, equity vesting or the sale of a business or other asset.
Soon-to-be retirees often use DAFs to plan for charitable giving throughout retirement. By front-loading your DAF during your high income-earning years, you can lower your taxable income in the current year while setting aside funds for giving in retirement when your income (and tax rate) may be lower.
#4 – Consider a qualified charitable distribution
The IRS allows individuals 70 ½ or older to make a direct donation of up to $108,000 from their tax-deferred retirement accounts to a charity through a QCD.
A QCD can count toward your IRA required minimum distribution (RMD) for the year, but it doesn’t increase your taxable income. This can help you avoid pushing into a higher tax bracket or triggering higher Medicare premiums and taxes on Social Security benefits.
For your charitable donation to count as a QCD:
• The charity receiving the donation must be a 501(c)(3) organization and can’t be a private foundation, DAF or supporting organization.
• Funds must be donated before the RMD deadline (Dec. 31).
• The distribution must be made payable directly to the organization from the retirement account’s trustee.
Zach Harney is a wealth manager at Creative Planning. He welcomes questions you may have concerning investments, taxes, retirement or estate planning. Send your questions to: Zach Harney, 2340 Garden Road, Suite 202, Monterey, CA, 93940. Or you can email zach.harney@creativeplanning.com. This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
