Here are four viable strategies to reap the tax benefits of charitable giving without itemizing your deductions:
1. Take advantage of qualified charitable distributions. If you're 70½ or older, you must take your required minimum distribution (RMD) from your IRAs and retirement plans. If you don’t, you could wind up with a hefty 50 percent penalty on the amount you should have taken. If your financial position is such that you don’t need the RMD, consider donating those funds or a portion of them directly to your chosen charity. You aren’t required to itemize deductions on your tax return in order to do this. You’ll get an added bonus too, because while RMDs are taxable distributions, qualified charitable distributions are not. While RMDs are taxable, the portion taken as a QCD is not. This is helpful not only in reducing your taxes, but it also reduces the income level Medicare uses to calculate your premiums.
2. Donate appreciated stock. Donating stock instead of cash can be a savvy tax planning move. Given the changes in the rules for itemized deductions under the 2017 Tax Act, stock donations can reduce your tax bills if your total deductions exceed your new increased standard deduction amount. And with a charitable gift of appreciated securities, the donation you make and the deduction you receive are greater than they would be if you were to sell the shares and donate the cash proceeds. That’s because when you donate shares, you avoid paying the capital gains tax. It’s a win-win because the charity won’t have to pay taxes on the stock, either.
3. Bunch your company stock donations. If you don’t routinely exceed the new standard deduction of $12,000 per year for single filers or $24,000 per year for those who are married, you can get over the hurdle by grouping together your stock donations to charities or donations to a donor advised fund (we’ll talk about those next). Known as "bunching", this process allows you to maximize your contribution and the amount you’re able to itemize by making multiple years' worth of donations together in one year.
4. Set up a donor advised fund. A donor advised fund (DAF) is a simple, flexible and tax-efficient way to conduct your philanthropy. Functioning much like a personal foundation, you can donate a wide variety of assets to your donor advised fund. Here are some of the many reasons these philanthropic vehicles are surging in popularity:
- While you're deciding which charities to support, your donation can potentially grow based on your investment preferences, making even more money available for charitable donation.
- You can also divvy up your charitable distributions however you prefer, whether it’s to one qualifying charity or to a number of them.
- The year you give funds to your DAF is when you get the tax deduction, not the year you disburse to a charity, so you receive immediate tax advantages.
- Donor advised funds have flexible contribution guidelines. A broad range of asset types—for example, cash, publicly traded securities, and real estate, among other financial and physical assets—may be donated to a DAF. Any asset that can be accepted by the managing charity may be accepted by the DAF, which helps you to receive the best possible income tax deduction opportunities.
- Unlike cumbersome and expensive private foundations, DAFs are easy to administer. You can also choose whatever name you like for your fund.
- Unlike private foundations, which require an annual report that discloses board members, grant recipients, and other information, DAF grants are made in the name of the managing charity, protecting the identities of the underlying donors.
- DAFs allow owners to delegate part of their giving to other family members, should you choose to do so.
- They offer the additional attraction of enabling you to include family and friends in your philanthropic process.
Donor advised funds remain a useful tax planning and charitable giving vehicle, particularly for taxpayers who are in a high-income tax bracket and regularly give to charities. Under the new tax law, they have become even more useful. They provide the flexibility to make charitable contributions at your convenience while allowing you to bunch the tax deductions from those contributions into a single year.