Year-End Charitable Strategies

Karen Van Voorhis |

If you are thinking of making charitable contributions prior to year-end, you may have heard that it’s become more difficult to obtain any sort of tax benefit for those gifts. However, here are a few strategies that should give you more bang for your buck.

Give appreciated stock or funds, not cash. Pretend you give, say, $1,000, to charity each year, and you make the gift out of your checking account – there’s nothing wrong with that. However, if you also happen to have $1,000 in highly appreciated stocks or mutual funds – that is, holdings in a non-retirement account with low cost basis – you can also simply gift those shares to charity in place of the cash (the charity won’t be hit with a tax bill when it sells the shares, and will simply receive the cash proceeds). Both gifts are worth $1,000. However, the gift of stock benefits you, because were you to sell the highly appreciated stock – as one likely will, eventually – you would pay tax on the gains. If you happened to be wedded to that particular stock that you just gifted, you could always replace the $1,000 in stock by simply moving the $1,000 in cash from your checking account into your investment account, and re-buying the same stock, at a higher cost basis than what you had before.

Bunch your gifts every two or three years. Because the new tax law means that most people are not itemizing their deductions, it’s become much harder to derive a tax benefit as a result of making charitable gifts. However, you might be able to itemize – and therefore take a tax deduction for your charitable gifts – if you bunch your donations together into two or three years’ worth, all at once. This may allow you to itemize in those years of larger gifts, and you can go back to taking the standard deduction in the off years.

Use a donor advised fund (DAF). Donor advised funds are charitable accounts which have skyrocketed in popularity – they are easy to administer, allow for privacy, and are the perfect tool to use to implement the bunching method above. DAFs are technically 510(c)3 organizations, which means that your gift – and therefore any subsequent tax benefit - actually occurs at the point that you fund your DAF account. From there, you can take your time to further distribute funds to charitable organizations whenever you’d like. People sometimes open a DAF when they have highly-appreciated stock, and they understand that it makes more sense to gift that stock (vs. cash), but the amount of stock in question exceeds their usual level of annual giving. If they contribute the stock to a DAF account, they can potentially deduct its value (using the bunching method), but can leave the stock in the DAF until they want to further distribute gifts to various organizations (making, perhaps, steady annual gifts that organizations are more used to receiving).

Make a gift from your IRA. If you are over age 70 ½, you can make what is called a qualified charitable deduction (QCD) directly from your IRA. To do this, you need to work with the custodian of your IRA to directly move funds from your account to a charity. You don’t get any sort of a tax deduction for the gift, but, alternately, the distribution itself is tax-free (unlike typical IRA distributions). This is effectively the equivalent of a tax deduction, and you don’t have to worry about itemizing vs. taking the standard deduction, or using a bunching strategy in an effort to derive a tax benefit from your gift. QCDs make a lot of sense if you are taking a required minimum distribution (RMD) that you don’t really need, and which would otherwise be fully taxable. Many people set up QCDs to total the same amount as their RMD, thus effectively giving their RMD to charity, avoiding tax on the RMD, and taking the equivalent of a tax deduction for the QCD.

While many of us believe in philanthropy, past tax laws have sweetened the pot, affording people a variety of tax benefits as incentives. These are becoming harder and harder to capture, largely due to the passage of the Tax Cuts & Jobs Act, which went into effect in 2018. Keeping these techniques in mind may help you make the most of your charitable gifts.