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Don't Lose Out on Deductions: 4 Ways to Increase the Tax Benefits of Your Charitable Giving

You're already donating to charity; why not receive a tax benefit as well?

Joel S. Greenwald, MD

Disclosures

September 29, 2021

In my experience as a financial advisor, physicians — most likely including you — give generously to charities. As long as you're donating, why not receive a tax benefit? It's gotten a bit more complicated but it's certainly doable.

The Increase in the Standard Deduction Makes It Harder

Let's start with some background. The 2017 Tax Cuts and Jobs Act (TCJA) nearly doubled the standard tax deduction. For 2021 it is $12,550 for single filers and $25,100 for married couples. The resulting combination of the TCJA with the $10,000 limit on the deductibility of state and local taxes results in only around 10% of Americans itemizing rather than taking the standard deduction.

Why should you care? Because if your itemized deductions, including charitable giving, don't exceed $25,100, you will take the standard deduction and won't receive much tax reduction benefit from your charitable giving. If you are married and take the standard deduction, you can only deduct up to $600 for charitable giving. Fortunately, you can plan for a much more significant tax deduction, even under the new rules.

Let me tell you about four practical tax-saving strategies for your charitable gifting.

Strategy #1: Gift Appreciated Assets

The first method is to avoid capital gains taxes from selling appreciated investments. For example, your house of worship is starting a capital campaign and has approached you for a $50,000 donation. If you dig deep, you can afford it. But instead of donating cash, let's look at what a gifted appreciated asset is and why it would be a better alternative.

Say you invested $10,000 in a stock 10 years ago. That holding is now worth $50,000. If you sell the stock and donate the proceeds, you'll have to pay 15%-20% in federal capital gains taxes (depending on your income tax bracket). You'll lose even more if your state, like my beloved Minnesota, has capital gains taxes.

Here's a solution. Gift the $50,000 of stock directly to the charity, which can turn around the next day and convert it to cash. You'll avoid paying any capital gains tax, and the entire $50,000 will count toward charitable gifting. Sounds good, right?

Strategy #2: Lumping

Let's look at another technique, called lumping, where you "lump" together 2 years of charitable gifting. This strategy makes sense if your other deductions bring you close to exceeding the standard deduction for the year.

For example, you may plan to gift $5000 to charity in 2021, and your other deductions equal $20,000, for a total of $25,000 in deductions if you itemize. Rather than itemizing, you would take the standard deduction of $25,100. Your total $5000 in charitable gifting will only provide a $600 tax benefit.

Here's where lumping comes in. You can lump 2 years of $5000 in charitable gifting together, contributing the total of $10,000 for this year and next. Your itemized deductions for 2021 are now $30,000. With this method, you get more tax benefit from your charitable contributions. If no other assumptions change, you will take the standard deduction in 2022.

There are some catches to lumping, though. First, it requires more planning. Second, it's awkward explaining to your favorite charities that you're doubling your charitable donation this year but skipping your contribution altogether next year.

Strategy #3: Donor Advised Fund (DAF)

A Donor Advised Fund is similar to the lumping idea but on a larger, more impactful scale.

Let's say your annual deductions without charitable gifts are $10,000 each year. In addition, you gift $15,000 per year to charity. In this scenario, you will opt for the standard deduction of $25,100 rather than itemizing. And you will never receive more than the token $600 deduction from your charitable gifts allowed when using the standard deduction.

You might try this instead: Open a DAF and deposit $45,000, with the assumption that you want to gift $15,000 to charity per year for each of the next 3 years.

Over the next 3 years, you give your usual donations to your usual charities but the gifts are made from the DAF. It's kind of like gifting from a charitable bank account.

Now, let's see what the tax benefit of contributing $45,000 per year looks when you use a DAF. In the year you deposit the $45,000 into the DAF, you will itemize your deductions: $45,000 to charity plus the usual $10,000 in other itemized deductions, for a total of $55,000 in itemized deductions. This is well above the $25,100 standard deduction. It works because your contribution to the DAF is considered a completed gift — and no longer your asset — when you put cash or securities into the account. For the next 2 years, you take the standard deduction. In year 4, you repeat the process by contributing $45,000 to the DAF and itemizing on your taxes.

Good deal, right? Plus, if you gift to the DAF with appreciated assets, as described above, you'll avoid capital gains.

Strategy #4: Qualified Charitable Distribution (QCD)

Are you older than 70.5? Then the qualified charitable distribution (QCD) strategy is probably your best bet.

Once you hit 70.5 years old, you can get the greatest tax benefit with a QCD. This simply means gifting directly from your IRA account, up to $100,000 per year. A withdrawal from your IRA won't be included in the Adjusted Gross Income (AGI) calculation, even though the money is coming from a pre-tax account. Once you are 72 years old and must start taking Required Minimum Distributions (RMD) from your pre-tax accounts, the QCD counts toward satisfying your annual RMD. Clients who have been gifting from a Donor Advised Fund empty and close that account when they reach 70.5 and switch entirely to gifting via the QCD method.

The Bottom Line About Tax-Aware Charitable Gifting

The new tax regulations make receiving tax benefits for your charitable deductions more complicated than in the past. But you can see how the strategies above can empower you to give to your favorite organizations without the government eating away at it. With proper planning, two great things happen: You can feel good about giving while potentially avoiding thousands of dollars in tax payments. Not a bad plan.

Disclaimer: We do not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.

The above article is intended for informational purposes only. Please consult a legal or tax professional regarding your situation.

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About Dr Joel Greenwald
Joel S. Greenwald, MD, is a graduate of the Albert Einstein College of Medicine in Bronx, New York, Joel completed his internal medicine residency at the University of Minnesota.

He practiced internal medicine in the Twin Cities for 11 years before making the transition to financial planning for physicians, beginning in 1998.

Joel's wife is a radiation oncologist, making him all too familiar with the stress of medical practice.

Knowing firsthand the challenges of practicing medicine, Joel's passion is making the lives of physicians easier by helping relieve them of financial worries.

Connect with him on LinkedIn or on his website.

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