How to Get More Bang for Your Charitable Buck

May 22, 2017
Andrew Witherell, CFP®

The tax laws that regulate charitable deductions can make your head spin. As a result, many dentists aren’t getting the full benefit of their charitable deductions, due to a lack of planning or understanding. Here is some advice about what you can do to make sure your chosen cause is receiving the maximum benefit of your gift.

Tax deductions for charitable gifts must bee taken in the year in which you benefit from itemizing your deductions.

You are a good person and have identified a charitable cause about which you feel strongly enough to support through a gift of money or property. That’s wonderful! You also may know that the tax laws encourage you to give through the allowance of tax benefits for contributions you make to charities (albeit with certain limitations). Yet because these rules can be a bit esoteric, there will be many people this tax season who won't make full use of them due to a lack of planning. Here are a few quick planning tips to help you and your chosen cause get the full benefits of your contribution.

Maximize charitable gifts in years in which you benefit from itemizing your tax deductions.

Do you or your spouse make mortgage payments, live in a place with high state or property taxes, or pay someone to manage your investments or prepare your taxes? If so, you may have the ability to deduct these and certain other expenses against your income for the purposes of calculating your income tax bill. These allowable itemized deductions can benefit a taxpayer to the extent that they exceed the standard deduction in a tax year ($6,350 for single filers in 2017 and $12,700 for married filing jointly). Additional itemized deductions above these amounts can, with certain limitations, further reduce one’s taxable income for the year.

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What does this all mean for those charitable contributions you plan on making? It means that to receive a tax deduction for those contributions, you must make them in a year in which you benefit from itemizing your deductions versus taking the standard deduction. How can you make this scenario more likely? One common strategy is to change the timing of your itemized deductions by "bunching" them together into a single tax year, delaying the payment of earlier expenses and/or accelerating the payment of the next year’s expenses. This is possible due to the simple principle that your deductible expenses are recognized in the year in which you pay them, not the year in which they are incurred. For example, if you decide to pay your 2016 property tax (one of the various itemized deductions) on January 1, 2017, and then pay your 2017 property tax by December 31, 2017, you will double up your property tax deduction in tax year 2017, increasing your 2017 itemized deductions while simultaneously lowering your 2016 itemized deductions. Through this approach, you can benefit from itemizing your deductions in a year in which you plan on giving to charity. This “timing” of tax deductions is fully allowed, and can be an excellent way to maximize the tax benefits of charitable giving.

Make charitable contributions directly from your IRA if you're over 70.5

If you are over the age of 70.5, you are probably familiar with the required minimum distribution (RMD) rule which requires you to withdraw a specified amount from your individual retirement account (IRA) when you reach the age of 70.5 and every year thereafter. These withdrawals are typically included as taxable income for purposes of calculating your income tax for the year. The additional income can in turn reduce the amount of itemized deductions you are allowed to take due to what are known as phase-out rules for itemized deductions, thereby further increasing your taxable income: a domino effect of higher income and higher taxes.

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Last year, Congress made permanent a giving strategy known as the qualified charitable distribution (QCD). This applies to anyone over the age of 70.5 who has an IRA. The QCD rule allows you give up to $100,000 from your IRA directly to a qualified charity and provides that such a distribution will not be included as taxable income to you. This has the effect of reducing your income without the need to itemize deductions (as discussed in the section above), and without the introduction of the potential domino effect created by the phase-out rules.

Make gifts of appreciated securities, not cash

Although donating money to a qualified charity by handing over a check or cash may entitle the donor to tax deduction for the contribution, there could be even more effective ways to make the contribution. One of these approaches is directly donating stocks, mutual funds, bonds or certain other investment assets which have been owned for more than one year and have appreciated above their original purchase price.

Why is this advantageous? Because donating appreciated securities and certain other investment assets may provide a double tax benefit: You may be able to receive an itemized deduction for the value of the securities you donated, and you may also avoid having to pay taxes on the gains you would have made from the investment had you sold it. This represents an incredibly rare and completely allowable opportunity to “double-dip” on tax benefits. It is important to note that this technique does not apply to securities that are held in a retirement account such as an IRA or 401(k).

If you don’t have any securities or other investment assets outside of retirement accounts that have appreciated in value, it is almost always better to donate cash instead. Donating a security which has lost value since you purchased it is typically not advantageous because one is typically only allowed a deduction for the value of the security that was donated, and not for the loss that is incurred on the investment. In this scenario, it would probably be better to sell the depreciated stock, recognize the loss on your taxes, and then donate the cash proceeds from the sale of the security to the charity.

Giving your stuff counts

Spring cleaning season is upon us. Many of us will find several items in our closets (or our children’s post-Christmas closets) that take up more space in our homes than they are worth to us. Before we simply pack all that stuff in bags and haul it down to the local charity of choice, we should take the time to figure out how much of an itemized deduction we may be eligible for based upon the stuff we give. IRS publication 561 spells out in great detail the amounts that can be deducted, but it’s not the most user-friendly document. The Salvation Army is one of several charities that offers a more friendly valuation guide based on the IRS guidelines. By taking the time to add up the value of the stuff you give, you may find some extra savings on your tax bill.

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