December is the season of giving. Whether this increase in giving is spurred by the spirit of the holidays or squeezing in some last-minute deductions before the tax year ends, we are here to share some important information before you decide on your method of giving, and how much you want to give.
For any charitable gift to be eligible for this year’s tax deductions, it must be made by December 31. However, there may be benefits to holding off and doubling your charitable gifting next year, a process called “bunching.” Bunching allows a taxpayer to make multiple years’ worth of charitable gifts in one year and take the multiple years’ deductions. This can be beneficial based on whether the standard deductions or itemized deductions are greater for you. Give us a call to determine if bunching may be beneficial for you. Your CPA can also help you determine the maximum amount you are eligible to deduct, and therefore the maximum amount you can give and receive tax benefits for.
Regarding the method of giving, several methods may be right for you, depending on your circumstances. For example, many individuals choose to use Donor Advised Funds (“DAFs”). DAFs are accounts that assist in charitable giving. The donor sets up the account, funds it with money, and then can recommend that distributions be made to their favorite charities. DAFs allow your donations to grow tax-free while they sit in the account. They are also great for individuals who may not know just yet to whom they would like to give. The donor is allowed to claim the deduction in the year they contribute to the DAF, rather than the year in which the money is given to charity. Thus, if you are considering a last-minute gift for this tax year, but you are not ready to decide where you would like to donate, a contribution to a DAF may be a good option for you.
Another way to give is by making charitable distributions from qualified retirement accounts. For donors who have required minimum distributions, the donor may divert up to $100,000 directly to a qualifying charity (i.e., a public charity, not a DAF or foundation). While a charitable distribution does not allow the donor to take a tax deduction on the donation, it provides the benefit of counting toward the account holder’s required minimum distributions, without having to claim the distribution as income.
Finally, donors should strongly consider making donations in the form of appreciated, publicly traded stock instead of cash. This benefits the donor by allowing them to claim the fair market value of the stock for their deductions, without having to pay the capital gains tax on the increase in value. This means the donor gets double tax benefits – avoiding the capital gains tax and claiming the deduction! Further, there is no need to worry about passing off the tax burden to the charitable organization, because they are tax-exempt.
Whatever your reason for giving this season, you have several avenues available to you. Before making any donations, it is important to consult Schooley Law Firm or your tax preparer to ensure you are making the most advantageous choices for you.
If you are interested in discussing year-end gifts, please contact us today at (804) 270-1300 to schedule a consultation with one of our attorneys.