Charitable Donations: Strategies for Donations Sizes

Large or small, every donation counts towards doing good. Depending on either your financial situation and/or overall charitable inclination, you may have a budget for how much you donate per year. While the act of giving is a benefit by itself, taking advantage of potential tax deductions are a plus. Below are a few strategies to consider depending on your inclinations:

Small

Back in 2020, the CARES Act created an incentive to get more individuals to donate in the midst of the pandemic. In 2020, you were able to take an above-the-line deduction of up to $300 in cash donations to qualified charities. This was viewed as unfair for those married filing jointly as the $300 limit applied to them as well. Since then, the rules have been modified where for the 2021 tax year, married couples can now take the above-the-line deduction of up to $600 ($300 per spouse).

Midsize

Qualified Charitable Distributions (QCDs) provides retirees a tax-efficient charitable donation strategy that can fulfill most midsized donation goals. Under a QCD’s structure, you can donate up to $100,000 per year to qualified charities from IRA assets. The amount donated completely avoids taxation. Two items to keep in mind: you must be at least age 70.5 to qualify for a QCD AND the donation must go directly to the charity of your choice. One of the side benefits of proceeding with a QCD is that once you are subject to Required Minimum Distributions, you may only have to distribute a smaller amount since the IRA’s balance is likely to be lower.

Large

There are a few ways strategies for large donors to take advantage of. One way is through of Donor Advised Funds (more about this in our blog here). By donating highly-appreciated assets through a Donor Advised Fund, you can receive a tax deduction as well as eliminating the potential capital gain tax consequence if it were sold. One should keep in mind that in order to receive the deduction, the donation should be greater than the standard deduction in order to qualify.

If charitable giving is an integral part of your legacy planning, naming charities as beneficiaries may also be another potential option. While naming a charity as a beneficiary in an IRA may not provide you with an immediate tax benefit, doing so will result in the IRA assets avoiding taxes altogether upon passing.  While charities can be named within a Roth IRA, it is not recommended as the tax-exempt charity would be receiving a tax-exempt benefit.

Conclusion

One or all of these strategies may work in your favor depending on your charitable intentions. Understanding how much you want to budget for charitable donations should be a good first step. The next step is carefully planning how to best approach donations for tax purposes. Consulting with a fee-only financial planner can help you determine the best course of action.

Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.