Maximize Your Year-End Donations: Tips to Boost Funding for Your Cause!

The holiday season is often associated with generosity, yet financial specialists remind us that it’s also acceptable to benefit personally from giving.

Charitable contributions have faced challenges over the last two years due to soaring inflation and rising interest rates that have squeezed personal finances. In 2022, amidst inflation reaching a peak not seen in four decades, the total amount of charitable donations adjusted for inflation fell by 10.5% to $499.3 billion, as reported by Giving USA, a nonprofit focused on philanthropy research.

By 2023, the decrease in inflation-adjusted donations slowed to 2.1%, totaling $557.16 billion. With inflation softening and interest rates beginning to decrease, there is optimism that Americans will help further reduce this shortfall or possibly even reverse the trend this year.

However, recognizing that many may still be facing financial constraints, finance experts provide strategies for maximizing both charitable impact and personal financial benefits.

“Cash donations are common,” notes Dr. Una Osili, Associate Dean for Research and International Programs at the Indiana University Lilly Family School of Philanthropy. She adds that there has been increasing “sophistication in giving methods” over recent years.

Cash may not be king

Dropping cash into local red kettles during the holiday season is simple, but might not be the most effective way to donate, according to experts.

“Dropping money into a Salvation Army bucket doesn’t involve much process,” explains Mark Steber, Chief Tax Officer at Jackson Hewitt.

However, making contributions that provide a receipt can be beneficial for tax purposes.

• When you itemize deductions on your tax return, you can claim a charitable deduction with proper documentation, which includes a bank record or a written acknowledgment from the charity that includes the organization’s name, and the amount and date of the donation, as per the IRS.

• Experts suggest that instead of cash, consider donating assets that have appreciated over the long term, such as stocks, mutual funds, bonds, real estate, or shares in private companies. This strategy allows donors to avoid capital gains taxes and claim a deduction for the full market value of the asset, according to Brandon O’Neill, a charitable planning consultant at Fidelity.

“With the stock market seeing record returns, donating appreciated assets is a smart way to give without needing to sell your investments and incur tax liabilities,” says Amy Theisen, Senior Strategist for Estate and Legacy within the Client Needs Research team at Edward Jones.

Note that deductions for donated appreciated securities are limited to 30% of your adjusted gross income (AGI).

“And because you’re not cashing out, you might have funds available to reinvest in new stocks,” adds O’Neill.

Method to the madness

The manner in which you donate is just as crucial as the act of donating itself, experts emphasize.

Here are some efficient strategies to support charities while managing finances:

Donor-advised funds (DAF): These are charitable investment accounts where donors can make a contribution, receive an immediate tax deduction, and recommend grants from the fund over time. The funds can be invested and grow tax-free, potentially increasing the amount available for future donations.

“You don’t need to contribute to it annually; you can add to it as strategically needed,” Theisen mentions. “It offers flexibility.”

Previously thought to be tools only for the very wealthy, DAFs are now accessible to a broader audience and are simple and cost-effective to set up, especially compared to establishing a foundation, according to O’Neill.

“You can set up a DAF in about five minutes on our website,” he says. “Assets can be swiftly transferred depending on where they are held, and we can issue a tax receipt.”

Some providers might require a minimum deposit to open a DAF, but others, like Fidelity, do not.

“Wealth is not a prerequisite for having a DAF,” O’Neill notes, pointing out that the median balance in Fidelity’s DAF accounts is $21,000.

Bunching: Since the standard deduction was doubled by the 2017 Tax Cuts and Jobs Act, only about 10% of Americans now itemize deductions and can benefit from charitable tax deductions, Steber explains.

For 2024, standard deductions are set at $14,600 for single filers and married persons filing separately, $21,900 for heads of household, and $29,200 for married couples filing jointly or surviving spouses.

If your deductions are near the threshold for itemizing, you can ‘bunch’ multiple years’ worth of donations into a single year to surpass the standard deduction and itemize, then switch back to taking the standard deduction in other years to save on taxes, experts advise.

This strategy can also help in high-income years, perhaps from a business sale or significant bonus, or when conducting Roth conversions, adds O’Neill.

When converting a traditional IRA to a Roth IRA, which typically incurs hefty taxes, upfront charitable contributions can help manage taxable income.

Qualified charitable distributions (QCD): Individuals aged 70½ or older can make QCDs directly from their taxable IRAs to qualified charities, up to $105,000 annually, tax-free. These distributions do not count towards taxable income, thus not affecting your tax bracket, and are not dependent on itemizing deductions.

For those at least 73 years old, QCDs can also satisfy the required minimum distributions (RMDs) for the year.

A few other things to remember

• Generally, only taxpayers who itemize can claim charitable deductions.
• If you lack financial assets to donate, consider volunteering. While the value of your time isn’t deductible, you may be able to deduct unreimbursed out-of-pocket expenses related to volunteering, like mileage, tolls, and parking, according to Steber.
• Increase your contribution if your employer matches donations. Note that you cannot claim a deduction for the portion of the donation matched by your company, experts advise.
• Not all companies match grants made from DAFs, so check your employer’s matching gift policy to confirm eligibility and details, Theisen points out.
• Even if you don’t itemize on your federal tax return, your donation might still be deductible on your state tax return, as many states don’t follow the same rules as the federal government regarding itemized deductions, explains Richard Pon, a certified public accountant in San Francisco.
• Purchases of raffle tickets or auction items at charitable events generally aren’t considered donations for tax purposes, Pon notes. Similarly, contributions to GoFundMe-type campaigns usually aren’t deductible since they are often not made to “qualified” charities, Steber adds.
• Be aware of your limits. Generally, deductions for donations of long-term appreciated assets held for more than a year are capped at 30% of AGI. For all other contributions, including cash, the limit is typically 60% of AGI, according to Fidelity.