Using tax-efficient vehicles to make charitable contributions isn’t merely to save on taxes for yourself. It also maximizes the impact of your donations by ensuring the most money possible goes directly to the causes you care about.
Here are three common methods to get more bang for your buck when giving generously:
- Qualified charitable distributions (QCDs) allow you to make non-deductible donations to qualified charities directly from your individual retirement accounts. If you’re age 72 or older and don’t need the income from your annual required minimum distribution (RMD), QCDs are a great way to satisfy your required amount and reduce your taxable income. Although RMDs count as income, your qualified charitable distributions do not. If you take your annual RMD and give a cash donation to your church later, for example, you’ve paid unnecessary tax on that gift. You could have sent money from your IRA directly to your church and only paid tax on the remaining RMD amount.
- Charity bunching requires making one larger donation in lieu of smaller, more frequent donations over time to increase your tax deduction. For example, instead of writing one $2,000 check each year for three years, write one for $6,000 in the first year and forego the gifts in years two and three. If you’re in a financial position to do so, these larger gifts will enable you to save more taxes on your charitable gifts. After all, you’ve already paid tax on funds that reside in your bank accounts, so if you’re giving directly from those accounts, it’s best to use a tax-saving strategy like charity bunching.
- Donor-advised funds (DAFs) act like investment accounts – allowing you to save, invest and grow your assets over time. However, they also send money directly to the charities to which you routinely give—without the headache of keeping up with receipts for donations throughout the year. DAFs provide the benefits of a charity-bunching strategy by enabling the full write-off amount in the year the DAF is funded, rather than when the contribution is paid to the charity. Additionally, if your stock investments have appreciated, you can avoid paying taxes on the capital gains by gifting the funds into a DAF and claim the full tax deduction.
There are additional advanced planning strategies that offer tax savings for charitable contributions, but each has a slightly different goal. It’s wise to talk with your financial advisor about which vehicle is best to maximize the impact of your gifts and realize the tax-saving benefits of charitable giving.