As the year draws to a close, many individuals consider how their charitable contributions can support the causes they care about. With some strategic planning, these contributions may also provide potential tax benefits. By understanding the options available, you can make informed decisions about your giving, helping to align your financial goals with your desire to give back. 

This article explores how charitable donations made before the year ends might reduce taxable income and outlines key strategies for making the most of your giving in a tax-efficient way. 

The Benefits of Charitable Giving 

Charitable giving offers a unique opportunity to align your generosity with financial considerations. While the primary motivation may be supporting the causes you care about, understanding the potential tax implications can add an additional layer of value to your contributions. Below are some key benefits to consider when planning your year-end donations. 

1. Tax Deductions for Donations
   

   Charitable contributions to qualified organizations may offer tax benefits, potentially lowering your taxable income. When properly documented and itemized, these donations can help manage the amount of tax owed by factoring in the value of your charitable giving. 

2. Feel Good While Saving

   Donating to causes that matter to you allows you to support communities, initiatives, and issues you care about. In addition to this personal satisfaction, the potential tax advantages of giving can make charitable donations a thoughtful financial decision.

3. Potential Long-Term Financial Impact

   Careful planning of your charitable contributions might provide more than just immediate tax-related benefits. By incorporating charitable giving into your overall financial strategy, it may contribute to achieving long-term financial objectives while maintaining your philanthropic values. 

Qualified Charitable Organizations 

When it comes to charitable contributions, not all organizations qualify for tax deductions. The IRS has specific requirements that must be met for donations to be eligible. 

Definition and IRS Requirements 

To claim a tax deduction, contributions must be made to a qualified charitable organization, as defined by the IRS. These typically include nonprofits such as religious organizations, educational institutions, and public charities. Private foundations may also qualify, but it’s important to verify the organization’s tax-exempt status.  

How to Verify a Charity’s Status 

Before making a donation, it’s essential to confirm the organization’s eligibility. Tools like the IRS Charity Check and Guidestar can help verify whether an organization is recognized as tax-exempt under IRS rules, making your contribution eligible for potential tax benefits. 

Examples of Charitable Contributions That Qualify 

Donations can come in various forms beyond just cash. Qualified charitable contributions may include appreciated securities (like stocks or bonds), real estate, or even personal property such as art or vehicles. Each type of donation may have different reporting and documentation requirements, so it’s important to keep detailed records. 

Itemizing Deductions vs. Standard Deduction 

When deciding how to claim your charitable contributions, it’s important to consider whether you should itemize your deductions or take the standard deduction. This choice can impact how your charitable giving affects your overall tax picture.  

Itemizing to Claim Charitable Deductions 

Itemizing deductions allows you to include specific expenses, such as charitable contributions, on your tax return. For individuals with higher incomes or significant charitable donations, itemizing can be beneficial if these deductions exceed the standard deduction. High-net-worth individuals may find that itemizing provides a greater opportunity to account for their giving in a tax-efficient manner. 

Standard Deduction Limits 

If the total of your itemized deductions—including charitable donations, mortgage interest, medical expenses, and state/local taxes—does not exceed the standard deduction, you may not see additional tax benefits from itemizing. For 2024, the standard deduction is $14,600 for single filers and $29,200 for joint filers, meaning smaller charitable contributions may not provide as much tax leverage unless itemized. 

Recent tax laws have adjusted how much can be deducted for charitable giving. For instance, cash donations to public charities are generally deductible up to 60% of your adjusted gross income (AGI), while donations of appreciated securities may be capped at 30% of AGI. It’s important to stay up to date on these rules, as changes in tax laws can affect the deductibility of your charitable contributions. Consulting with a tax professional can help clarify the best approach based on current legislation. 

Strategic Giving Options 

For those looking to make the most of their charitable contributions, there are several strategic giving options that may offer additional financial benefits. These methods allow for more flexibility and potential tax efficiency when planning donations. 

Donor-Advised Funds (DAFs) 

DAFs have gained popularity among tax-conscious givers. A donor-advised fund allows individuals to make a charitable contribution to a fund, receive an immediate tax deduction, and then recommend grants to charitable organizations over time. This option offers flexibility by letting donors support multiple charities at their own pace, while also streamlining recordkeeping and maximizing potential deductions in high-income years. 

Qualified Charitable Distributions (QCDs) 

For individuals aged 70½ or older, QCDs are an option to donate directly from an IRA to a charity. QCDs can help meet required minimum distribution (RMD) requirements while potentially avoiding the income tax on those distributions. The maximum annual QCD amount is capped at $105,000 per individual in 2024 and $110,000 starting in 2025, which may be beneficial for those seeking to donate substantial sums while minimizing taxable income. 

Appreciated Securities 

Donating appreciated stocks or other securities can be a tax-efficient strategy for those with significant unrealized gains. By donating these assets directly to a charity, you may avoid capital gains taxes while receiving a deduction based on the fair market value of the security at the time of donation. This option can be especially advantageous if your investments have significantly appreciated in value. 

Bunching Contributions 

Bunching involves concentrating charitable donations into a single tax year to maximize deductions. For individuals who may not meet the threshold to itemize annually, bunching contributions into one year, rather than spreading them out, can help exceed the standard deduction and allow for more significant tax benefits. This strategy is particularly useful in years with higher-than-normal income or when other large deductions are present. 

Documentation Requirements 

Proper documentation is crucial when it comes to claiming charitable contributions on your tax return. Making sure that all necessary records are in order can help you avoid complications and meet IRS requirements for tax deductions. 

Receipts and Recordkeeping 

For any charitable donation, it’s important to retain receipts and records. Cash donations require a bank record or a written receipt from the charity, detailing the amount, date, and name of the organization. For donations of $250 or more, you’ll need a contemporaneous written acknowledgment from the charity, which must include specific details about the contribution and whether any goods or services were received in return. 

Form 8283 for Non-Cash Donations 

If you donate property worth more than $500, you’ll need to complete and submit IRS Form 8283 with your tax return. This form helps document the type and value of non-cash contributions, and if the value of the donation exceeds $5,000, you may also need to include a qualified appraisal of the property. Accurate reporting is essential for maintaining compliance with IRS guidelines. 

Fair Market Value Assessments 

For non-cash donations like clothing, art, or vehicles, determining the fair market value (FMV) is key to claiming the appropriate deduction. The FMV is the price the item would sell for on the open market, based on its current condition. When making significant non-cash contributions, obtaining a professional appraisal can help accurately determine FMV, helping your deduction reflect the true value of the item being donated. 

Year-End Deadlines 

Timing is crucial when it comes to charitable contributions, especially if you want them to count toward the current tax year. Being aware of key deadlines helps make sure that your donations are eligible for potential tax benefits. 

Key Deadlines for Charitable Contributions 

To qualify for a deduction in the current tax year, all charitable donations must be completed by December 31. This includes both cash and non-cash contributions. Keep in mind that checks must be mailed and postmarked by this date, while credit card donations must be processed by year-end to be eligible. Planning ahead is essential to make sure your contributions are recognized within the proper tax year. 

IRA Distributions and DAF Contributions 

More complex giving strategies, such as qualified charitable distributions (QCDs) from IRAs or contributions to donor-advised funds (DAFs), also follow the December 31 deadline. For QCDs, the distribution from your IRA must be completed by the end of the year to count toward your required minimum distribution (RMD). Likewise, contributions to DAFs must be completed before December 31 to potentially qualify for a deduction in the current tax year. Be sure to check with a financial professional to confirm that all transactions are processed in time. 

Consult a Financial Professional 

While charitable giving can provide both personal satisfaction and potential tax advantages, aligning your contributions with your overall financial strategy often requires professional guidance. 

Charitable giving strategies vary greatly depending on individual circumstances, such as income level, assets, and long-term financial goals. Consulting with a tax or financial professional helps structure your donations in a way that aligns with your specific situation. A professional can help you evaluate whether itemizing deductions, using donor-advised funds, or making qualified charitable distributions aligns with your broader financial and tax planning goals. 

Conclusion

As the year draws to a close, now is the time to review your finances and consider how charitable giving can play a role in your tax and financial planning. By taking a strategic approach, you can support causes that matter to you while potentially benefiting from tax deductions. If you’re unsure how to best align your charitable intentions with your financial goals, reach out to a financial professional on our team. We’re here to provide the guidance you need to make informed decisions before the year ends. 

Standard Disclosure 

This blog expresses the author’s views as of the date indicated, are subject to change without notice, and may not be updated.  The information contained within is believed to be from reliable sources.  However, its accurateness, completeness, and the opinions based thereon by the author are not guaranteed – no responsibility is assumed for omissions or errors.  This blog aims to expose you to ideas and financial vehicles that may help you work towards your financial goals. No promises or guarantees are made that you will accomplish such goals.  

Past performance is no guarantee of future results, and any expected returns or hypothetical projections may not reflect actual future performance or outcomes. All investments involve risk and may lose money. Nothing in this document should be construed as investment, tax, financial, accounting, or legal advice. Each prospective investor must evaluate and investigate any investments considered or any investment strategies or recommendations described herein (including the risks and merits thereof), seek professional advice for their particular circumstances, and inform themselves about the tax or other consequences of any investments or services considered.   

Investment advisory services are offered through Liberty Wealth Management, LLC (“LWM”), DBA Liberty Group, an SEC-registered investment adviser.  For additional information on LWM or its investment professionals, please visit www.adviserinfo.sec.gov  or contact us directly at 411 30th Street, 2nd Floor, Oakland, CA  94609, T: 510-658-1880, F: 510-658-1886,  www.libertygroupllc.com. Registration with the U.S. Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training.

References

Charitable Strategies Group. (n.d.). A Tax-Smart Approach to Maximize Your Philanthropic Impact. DAFGiving360. https://www.schwabcharitable.org/non-cash-assets/publicly-traded-securities 

Charity Navigator. (n.d.). Tax Benefits of Giving. https://www.charitynavigator.org/donor-basics/giving-and-taxes/tax-benefits-of-giving/  

Charity Navigator. (n.d.). What is Donation Bunching? https://www.charitynavigator.org/donor-basics/giving-and-taxes/donation-bunching/ 

Fidelity Charitable. (n.d.). What is a Qualified Charitable Distribution? https://www.fidelitycharitable.org/guidance/philanthropy/qualified-charitable-distribution.html 

Fidelity Charitable (n.d.). What is a Donor-Advised Fund (DAF)? https://www.fidelitycharitable.org/guidance/philanthropy/what-is-a-donor-advised-fund.html 

Givewell. (n.d.). Charitable Donation Tax Deadlines for 2024 (US Taxpayers). https://www.givewell.org/about/donate/tax-deadlines 

IRS. (n.d.). Publication 526 (2023), Charitable Contributions. https://www.irs.gov/publications/p526 

Scott, Michelle. (July 25, 2024). Charitable Contribution Deduction: Tax Years 2023 and 2024. Investopedia. https://www.investopedia.com/articles/personal-finance/041315/tips-charitable-contributions-limits-and-taxes.asp