Many in the charitable community worry that recent reforms will eliminate tax deductions for charitable giving. They think this will crimp donations.
This concern arises from the fact that new federal tax laws doubles the standardized deduction to $12,000 for single filers and $24,000 for joint filers. As such, the number of people who itemize tax deductions will certainly drop.
Furthermore, the increase in the estate tax exemption to $11 million per person means fewer people will be motivated to make gifts to avoid estate taxes.
There is no denying these items will reduce tax deductibility for charitable contributions. However, rarely have I met a person who only contributes to charity to get a deduction.
As a side note, contributing to charity only to get a deduction is similar to spending money on anything just to derive a tax deduction. You are still spending a dollar to get back thirty cents.
Even if you don’t think you’ll itemize every year, there are simple strategies you can implement to help society and reduce your tax bill.
Obviously, charities accept cash. However, that requires that you earn money and then pay taxes. The net can then be donated. This still works, but is the least effective.
Gifting appreciated securities a favorite recommendation which can eliminate a tax obligation whether you itemize or not. Assume you invested in Google early on. Your cost basis is $1 per share. If you sold that stock today you would owe taxes on a gain of more than $1,100 per share.
Instead, if you gift the stock directly to your favorite qualified charity the tax obligation disappears and the charity gets the full benefit of the gift. You also may qualify for a charitable deduction if you itemize. This strategy is not limited to just stocks as it works well for any asset with a large deferred capital gain.
Do a Qualified Charitable Donation. When people turn age 70 ½ they are required to start taking minimum distributions from their qualified retirement plans such as a 401k, 403b or an IRA. If you receive this distribution you will pay taxes on it at your marginal tax rate and the net can then be donated.
Instead, work with the custodian of your qualified retirement account to donate the required distribution directly to charity. Although you can’t deduct this from your taxes, you also won’t pay income taxes on the distribution. This is a highly attractive method to benefit society and one that is frequently overlooked.
Bunch itemized deductions. Most people will not be able to itemize taxes every year. However, they may be able to do so every other year. In doing so, each December consider making your charitable contributions for the current year and the next year all at once. Try to stack additional itemized deductions such as medical expenses or property taxes two years at a time also.
Your favorite charity will appreciate the donation and you will improve your odds of being able to itemize and secure a deduction. This can be combined with donating appreciated assets to further the economic benefit.
These strategies work well whether donating to church, the local food bank, a donor-advised fund or community foundation.
If you don’t have appreciated securities or a required distribution there are plenty of ways to make an impact at area charities.
The biggest benefit you can offer is your time and talent. One of my favorite people routinely serves meals at Christs Kitchen while another religiously volunteers at Adopt-A-Pet. Although serving a meal or cleaning a kennel does not result in a tax deduction, it saves a charity from having to raise money elsewhere to provide these services. Others give their time and talent as board members for the Red Cross, Salvation Army or the local children’s’ home.
Additionally, donating time and talent may actually be good for your health. According to Ichiro Kawachi, a professor of social epidemiology at Harvard’s School of Public Health, volunteering lowers your blood pressure and extends your life span. Those benefits are far more valuable than any tax deduction.
No matter the tax bracket or net worth, every charity needs help from volunteers and donors. It is just a matter of figuring out the best way to maximize the benefit.