How to give to charities tax efficiently

If you’re charitably inclined, there are some ways you can help maximize your tax savings of the donations:

If you routinely make charitable donations every year but use the standard deduction on your tax return, you could be better off by “bunching” your donations. For example, if you normally give $10,000 every year to charity, perhaps consider instead giving $30,000 every three years. In the years of your bunched donations, you are more likely to have itemized deductions that are larger than the standard deduction, hence lowering your tax bill for the year.

Consider opening a Donor Advised Fund, or “DAF,” if you plan on bunching donations. On the surface, a DAF looks and feels like a normal investment account. However, it’s technically its own charitable organization. Since it’s a qualifying charitable organization, any money you put into a DAF is a tax-deductible donation. However, the money you put in doesn’t need to immediately be sent to other charities. Instead, you can keep the money in the DAF, invest it to let it grow, and then distribute the money out to other charities at some point in the future.

If you’re at least 70 ½ years old and have a tax-deferred IRA, you can make cash donations via Qualified Charitable Distributions, or “QCDs.” A QCD is when you directly donate money from your IRA to a qualifying charitable organization. Not only is the amount of the QCD not considered a taxable distribution to you, but it’s also allowed to take the place of any Required Minimum Distributions, or “RMDs,” you’d otherwise have to take.

Consider donating highly appreciated securities from your taxable brokerage account. Perhaps you have some stocks, bonds, mutual funds, etc. that you’ve held in your brokerage account for a long time, and they’ve since built up a lot of unrealized gains. If you were to sell the positions, you’d have to pay tax on the gains. Alternatively, you can donate the securities to a charity. When donated, neither you nor the charity has to pay tax on the gains.

For more information about these tax-efficient charitable donation strategies, check out a replay of the live video I recently did in my Facebook group, Taxes in Retirement.