Depending on your personal situation, you may be able to use advanced strategies for bigger tax savings. Make sure to consult your tax preparer before making any of these more complex moves.
Using a donor-advised fund (DAF). These funds can work especially well combined with the bunching strategy. With a DAF, you make a sizable tax-deductible contribution in one year to maximize your itemized deductions for that tax year. You can distribute the money in the DAF to various charities over the next few years as you would normally. You only get a tax deduction when you fund the DAF, not when the DAF distributes the money to organizations.
Another benefit to a DAF is your donation intentions are carried out in perpetuity when it’s administered by the Methodist Foundation.
Donate appreciated assets. When you directly donate appreciated assets – for example, stocks – you get two extra benefits. You avoid paying the capital gains taxes that would apply if you sold the asset. And you still get a charitable donation deduction to reduce your tax bill.
The Methodist Foundation can manage your stock donation at a lower fee than most brokerages and in less time.
Make a qualified charitable distribution. If you’re at least age 70 1/2, you can make a qualified charitable distribution (QCD) of up to $100,000 directly from your traditional IRA to the charity of your choice. These donations won’t be deductible, but you’ll still get a tax benefit. They count toward your required minimum distributions (RMDs) but won’t increase your taxable income the way regular RMDs do. Reduced taxable income means a lower tax bill, which may help you avoid paying taxes on Social Security benefits.
Bottom Line
There’s more to the charitable donation deduction than simply getting a dollar-for-dollar reduction of your adjusted gross income. The rules can get complicated, so consult your tax professional to make sure you get it right.
Article by Michele Cagan, CPA, is a SmartAsset financial planning columnist with insertions from the Methodist Foundation of North Alabama
Photo by Kelly Sikkema on Unsplash