As the year comes to an end, many people aim to maximize the impact of their charitable donations. Being strategic and intentional with your charitable contributions can create tax benefits for both you and your chosen charity. Whether you’re making cash donations, giving appreciated assets, or leveraging tools like IRAs and life insurance policies, there are several ways to boost the effectiveness of your contributions. Here are five ways to help maximize your charitable giving strategy, ensuring both financial and philanthropic goals are met.
1. Research Charitable Organizations
Maximize the impact your monetary donation can have by selecting reputable and transparent organizations. A qualified charity should be able to provide registration information, including 501(c)(3) status and tax identification number. You may also use the tax-exempt organization search tool available on the IRS website to obtain more specific information about the organization.
Third-party websites like Guidestar, Charity Navigator, Charity Watch, and Give Well offer unbiased, independent ratings and evaluations of charitable organizations. By using these sites you can learn more about the organization and how donated money is distributed. If you’re considering making a sizeable donation, it may be helpful to speak directly with the chosen charity to discuss how the gift will be utilized.
If you haven’t already, check with your employer about what opportunities they provide in regard to charitable giving. For example, some employers will match employee donations to certain organizations.
2. Bundle Your Donations
Bundling charitable gifts is a strategy where individuals consolidate multiple years’ worth of charitable donations into a single year to maximize their tax benefits. This approach is often used when the standard deduction exceeds their annual donations, making itemizing deductions less beneficial. By bundling, they can exceed the standard deduction threshold in one year, itemize their donations for greater tax savings, and then take the standard deduction in other years. This strategy is particularly useful for individuals who donate regularly but want to optimize their tax impact.
If you’re interested in accomplishing this, you might consider a donor-advised fund (DAF), which allows you to make a charitable donation and immediately receive a tax break. You can then make grants from the fund to charities of your choice over time.
To deduct charitable donations, you must itemize them on IRS Schedule A (unless using an IRA QCD, read about that in #4 below). To do this, you’ll need to keep track throughout the year of each donation made to a charitable organization. A donor-advised fund can help simplify this process because you only need a record of the original transfer into the DAF, not of every individual grant. In most other cases, the charity can provide you with an email confirmation or letter that documents the name of the charity, the gifted amount, and the date of your gift. If the charity does not have such a form handy, you may be able to use other forms of proof including:
- Receipts
- Credit or debit card statements
- Bank statements
- Canceled checks
3. Make Non-Cash Donations
Many charities welcome non-cash donations like stocks or other appreciated assets. In particular, high-income earners might consider a non-cash donation specifically because of the tax advantages they may be awarded.
For example, you may wish to consider gifting highly appreciated securities. Since selling securities can lead to a taxable event, it may be wiser to transfer long-term appreciated securities directly to your charity of choice (or DAF).
This transfer can accomplish three things:
- You can avoid paying the tax you would normally pay upon selling the shares.
- You may be able to take a current-year tax deduction for the full fair market value of the shares.
- The charity gets the full value of the shares, not their after-tax net value.
4. Utilize Your IRA
If you’re a retiree over the age of 70½, you might consider a Qualified Charitable Distribution. Transferring money from your IRA directly to a charity can be a tax-efficient way of meeting any required minimum distribution. Additionally, there’s no need to itemize your deductions to benefit.
Each taxpayer may distribute up to $105,000 annually. This increases to an acceptable $210,000 for married couples if they both have IRAs and are both over 70½.1
5. Utilize Your Life Insurance Policy
If you make an irrevocable gift of a life insurance policy to a qualified charity, you can get a current-year income tax deduction. If you keep paying the policy premiums, each payment may become a deductible charitable donation – although deduction limits may apply.2
If you continue to pay premiums after the gift, that could reduce the size of your taxable estate. The death benefit may be transferred out of your taxable estate, in any case.
You should consider determining whether you are insurable before implementing a strategy involving life insurance.
Whatever your situation, getting advice from a tax or financial professional can help you give wisely as the year comes to a close. If charitable giving is an important part of your financial plan, Heritage Financial can help you get the most value out of each donation.
Additional resources you may find valuable:
- Choosing Between a DAF and QCD
- A summary of IRS Tax Changes for 2024
- 2024 Important Financial Numbers to Know
1.https://www.schwab.com/learn/story/12-tax-smart-charitable-giving-tips
2.https://www.schwabcharitable.org/non-cash-assets/life-insurance-policies
