by Kevin Kroskey, CFP®, MBA
Charitable giving offers a meaningful way to support the causes you care about while also providing an opportunity to help your finances. When you donate to nonprofit organizations, you’re helping drive their missions forward. While the immediate impact is important, charitable giving also fosters a culture of generosity, setting a powerful example for your family and community.
The U.S. tax system rewards generosity by allowing deductions for donations to qualified organizations. To make the most of your charitable efforts, it’s important to understand how these tax benefits work and how you can maximize them.
The tax advantages of charitable giving depend on several factors. To qualify for deductions, your donations must go to eligible organizations, typically classified as 501(c)(3) nonprofits. These include charities, religious organizations, educational institutions, and certain government entities. It’s always a good idea to verify an organization’s status through the IRS’s online Exempt Organizations tool before making a contribution.
Types of Donations
Your donations can take different forms, each with specific tax implications. Cash donations are the most straightforward, and you can typically deduct the full amount, subject to annual limits. Non-cash contributions, such as clothing, furniture, or vehicles, are also deductible, but you’ll need to estimate their fair market value. For those with investments, donating appreciated assets like stocks or securities can be particularly advantageous, as you can deduct the full market value without incurring capital gains tax. If you volunteer your time, while the value of your time isn’t deductible, expenses related to volunteering – such as mileage or supplies – may qualify.
There are limits to how much you can deduct based on your adjusted gross income (AGI). For cash contributions to public charities, the deduction limit is generally 60% of your AGI, while donations of appreciated assets are capped at 30%. If your contributions exceed these limits, you can often carry the excess forward for up to five years. These limits highlight the importance of planning your giving in a way that aligns with both your financial situation and tax strategy.
To claim these deductions, you must itemize your deductions on your tax return instead of taking the standard deduction. The standard deduction for 2024 is $13,850 for single filers and $27,700 for married couples filing jointly. If your total itemized deductions, including charitable contributions, don’t exceed the standard deduction, you won’t receive a tax benefit for your giving. For this reason, many donors explore strategies to increase the impact of their contributions.
One popular approach is “bunching,” where you combine multiple years’ worth of donations into a single year. This allows you to exceed the standard deduction threshold in that year and take the standard deduction in other years. Another option is a donor-advised fund (DAF), which enables you to make a large, tax-deductible donation in one year while distributing the funds to charities over time. This approach provides flexibility and can simplify the management of your giving.
If you’re 70½ or older, a particularly tax-efficient strategy is a qualified charitable distribution (QCD). This allows you to donate up to $100,000 directly from your individual retirement account (IRA) to a charity. The donation counts toward your required minimum distribution but isn’t included in your taxable income, offering a significant benefit for retirees looking to support charitable causes.
For those with investments, donating appreciated assets like stocks can be a savvy move. Not only do you avoid paying capital gains tax, but you also receive a deduction for the full market value of the asset. This strategy can be especially effective for investors with portfolios that have seen significant growth.
Regardless of how you give, keeping detailed records is essential. The IRS requires documentation for all charitable deductions, so be sure to obtain receipts for every donation. For non-cash contributions over $500, you’ll need to complete additional forms, and donations exceeding $5,000 may require a professional appraisal.
The Joy of Giving
Beyond the financial benefits, charitable giving is deeply rewarding. Knowing that your contributions are making a difference in the world is a powerful feeling. While tax savings are a welcome bonus, the true value of giving lies in the positive impact you create. Giving also strengthens your connection to your community and provides a sense of purpose.
Charitable giving is more than a financial transaction; it’s an investment in the causes you care about and a reflection of your values. By understanding the tax implications and adopting thoughtful strategies, you can maximize your impact while minimizing your tax burden. Whether you’re just starting to explore philanthropy or looking to enhance your current giving, planning your contributions carefully will ensure your generosity goes further.
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Kevin Kroskey, CFP®, MBA is the Founder of True Wealth Design, providing “Accounting, Tax & Wealth Solutions To Help You Plan Smarter and Live Better.” This article is for educational purposes only. The strategies referenced apply to Accredited Investors or Qualified Purchases per SEC regulations. To explore how these strategies may apply to you, call or email [email protected].
Opinions and claims expressed above are those of the author and do not necessarily reflect those of ScripType Publishing.
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