December is the month of GIVING - so let's dive into the strategies of giving. Knowing the financial & tax strategies of giving could change the amount, when, and how you give.
You itemize your deductions. What does that mean? It means you add up your property taxes, state income tax, mortgage interest, medical expenses (with many exceptions), and charitable contributions. If the total is more than the standard deduction then all those types of expenses help you. If it is not, then you take the standard deduction.
Therefore, if you know those expenses will add up to more than the standard deduction, then all of those charitable donations are helping.
Typically, you either have a large home and pay a lot of mortgage interest
You have high income AND pay a lot in state taxes which are actually capped at $10k.
You give a lot to charity!
Of course normally it is a combination of all three!
Giving to Go-FundMe fundraisers, directly to individuals, or those not qualified as a 501(c)(3) does not qualify as a tax deductible donation! If you add a tip to Go-Fund Me, then that would count, but not the fundraiser itself.
Timing Your Tithe/Charitable Donations
Those who make large donations or tithe could potentially benefit by strategizing when they tithe. For example, if you tithe 10% on $100,000 of income, then that is $10,000 donated each year. $10k combined with your mortgage interest, property taxes, and state income tax is probably NOT enough to itemize your deductions.
However, if you save up your $10k for a year, donate it on January 1st of next year AND then start making your monthly charitable donations that same year, then your total charitable contributions would equal $20,000. Add in your mortgage interest, property taxes, and state income tax and you are very likely to itemize your deductions and therefore lower your taxes much more than if you had taken the standard deduction.
This strategy then results in itemizing your deductions every other year and likely saving you and extra $1,000 or more in taxes.
As you notice, this also requires a bit more work in saving your donations, planning, and calculating your deductions.
Donating Stocks, Funds, and Property
There are times when it makes sense to donate your investment directly to the charity, rather than selling it. For example, if you worked for Apple and had Apple stock with a large gain then instead of selling the stock and incurring capital gain taxes you could donate the stock to a 501(c)(3) charity, receive a tax deduction for it and avoid the taxes. This particularly makes sense for those who already planning on making a donation.
Another strategy is to donate the funds in your IRA to a 501(c)(3). You can do this to meet the RMD: Required Minimum Distribution if you are over 72. You can also do this to lower the value in your IRA which helps lower future RMDs if you are over 70.5. It also keeps your Adjusted Gross Income lower without having to itemize your deductions.
You can donate real estate to a donor advised fund or a 501(c)(3) charity that could accept/use the property. This would help you itemize your deductions and create large tax deductions. Of course it has to make sense for you personally to want to donate the real estate property.
Many of these strategies have various requirements - please consult with me or a tax advisor before attempting to process on your own. The higher your income, or larger an inheritance then the more it can make sense to implement these strategies.
What is a DAF: Donor Advised Fund?
A DAF or Donor advised fund is a charitable investment account. You donate to the fund and receive a tax deduction for it. That money can then be invested by you. You can then decide who AND when to donate the funds. When donating the funds to the charity then you do not receive an additional tax benefit. You only receive the tax benefit when you initially donate to your DAF. You then have a lot of control of how much, when, and to who you donate the funds rather than feeling constrained at the end of each year to donate to a specific charity. Basically it gives you flexibility and time to make these important charitable donation decisions.
In summary, GIVING can provide some financial & tax planning opportunities. But often these require careful and calculating decisions in order to properly benefit you.
If you tithe or donate often and in large amounts, then consider timing your donations. This may allow you to itemize your deductions and receive a larger deduction in one year.
If you are in the right tax bracket, have pre-tax retirement money (ex. IRA) or large capital gains in stocks, then you could gift the funds/stocks directly to a charity.
For more complexity in giving and taxes - research Charitable Trusts!
For more about taxes - check out The Basics of Taxes.
As always please reach out with any questions.
Blake Jones, CFP®, EA
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