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5 Ways to Maximize Your Charitable Deduction

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Charitable contributions have always qualified for an income tax deduction, but since Congress increased the standard deduction and limited deductions for local and state taxes in 2017, fewer taxpayers have been able to take advantage of it. The increased standard deduction, which now (for tax year 2024) is at $14,600 for a single individual and $29,200 for a married couple filing jointly, does help a lot of people who don’t have enough deductions to itemize and makes preparing tax returns much easier who might have itemized in the past. But it also reduces the benefit of the charitable deduction for many taxpayers. You must be very generous or have substantial other deductions, such as a substantial mortgage interest deduction, to be able to take advantage of the charitable deduction. (Another charitable deduction limitation that is unlikely to affect many taxpayers is that your charitable deductions cannot exceed 60% of your adjusted gross income (AGI).)

If your deductions don’t normally exceed the standard deduction, here are a few ways you might plan your charitable contributions to take advantage of the tax deduction, at least in some years:

  1. Give more. Of course, the more you give, the more likely amount along with your other deductions will exceed the standard deduction, making it worthwhile to itemize and receive a deduction for your charitable donations.
  2. Bunch your giving. While your annual giving along with your other deductions may not be sufficient to exceed the standard deduction in most years, it might if you gave a large amount in one year rather than spreading out your generosity over many years. You might also time your giving in order to be able to itemize every other year. Instead of making year-end gifts every year, you could alternate between making them in December and in January. For instance, if you normally give away $10,000 at the end of each year, you could give your end-of-year gifts in January 2025 instead of in December 2024, but then do so again in December 2025. That way, you will have given away $20,000 in 2025, making it more likely that you can take your charitable deductions.
  3. Give in high-income years. If your income fluctuates from year-to-year, you might make large contributions only in your high-income years. This can make the gifts more affordable and also maximize the value of the deduction if the higher income pushes you into a higher tax bracket. For instance, if you are normally in the 24% federal income tax bracket, a $10,000 charitable contribution will reduce your taxes by $2,400. But if a windfall pushes you into the 35% tax bracket for a particular year, the same gift will reduce your taxes (and the net cost of the gift) by $3,500 (not to mention the state tax savings). (Giving in high-income years can also help avoid the 60% AGI limit if that is relevant to you.)
  4. Use a donor advised fund. You could combine the strategies of bunching your giving and giving in your higher-income years with the use of a donor advised fund. All the major investment firms, including Fidelity, Schwab, and Vanguard, as well as some charities, such as the Boston Foundation, now offer donor-advised funds. These, in effect, allow you to stash your charitable dollars to give away at a later date. The way it works is that you make your contribution to the donor advised fund to be held in a special charitable account. You can take the charitable deduction in the year you make the contribution. Then you can direct that funds be donated from the fund to particular charities either in that year or in future years. You do not receive a further deduction when the funds actually receive the money, but if you either bunch your giving or give a substantial amount during a high-income year (perhaps when your company goes public or your sell your home), you will receive the tax benefit of your contribution in that year. (Some commentators question the policy of permitting donor advised funds since money may stay in the accounts for many years, with the investment firms receiving their fees all along, without actually going to charities.)
  5. Give from your retirement accounts. Once you reach age 73, you must begin taking your required minimum distributions (RMDs) from your retirement accounts, and pay taxes on the funds withdrawn, whether or not you need the money. Instead of taking your RMD and paying taxes on it, you can make a qualified charitable distribution (QCD) directly to a charity. These contributions may satisfy your RMD obligations. In addition, you can give more from your retirement funds without incurring a tax, up to $100,000 a year, and you don’t run up against the limitation on charitable donations that they can’t exceed 60% of your AGI. Finally, you don’t have to wait until you’re 73 to take advantage of this method of giving, but must be at least 70 1/2, the age at which RMDs had to begin until recently. Since you know you will have to begin drawing down your retirement funds and paying taxes on them at age 73, reducing their value through charitable contributions a few years before then also reduces your savings subject to this future tax hit.

These methods of planned charitable giving will not only reduce your income taxes but also allow you to give more to your charities of choice.

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