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Actions How Charitable Donations Affect Your Tax Bill
Key takeaways
- Charitable donations can have a positive impact on the world—and your taxes.
- Recent tax rules might affect when and how you contribute.
- Consider "bunching" your donations in one tax year.
Charitable donations give you a chance to support causes and organizations that work toward the common good. They can also offer tax breaks that make your effort a bit more affordable. By structuring and timing your donations well, you can take advantage of IRS rules while still making a difference in the world.
The most common way to contribute to charity is by donating cash, even if that means sending a check or using a credit card.
But you also can contribute shares of securties like stocks, mutual funds and ETFs you hold in a taxable account. If their value has risen since you bought them, you may be able to deduct that value when you file your federal taxes—and avoid paying capital gains taxes you’d owe if you sold the shares outright. (Before you commit to this type of donation, make sure to confirm that the charity accepts gifts of appreciated securities.)
Here’s how that could work: Let's say you’ve owned a stock for several years, and your gain—the difference between your purchase price and the current value—is $50,000. If your long-term capital gains tax rate is 15%, which is common for couples earning less than about $500,000 a year, selling the shares would trigger a $7,500 tax bill. (Short-term capital gains, on investments held less than a year, are taxed at your ordinary income tax rate.)
What’s more, if you itemize deductions when you file your federal taxes, you can also include some or all of your contribution. But even if you don’t itemize (and can’t take the deduction), avoiding capital gains taxes can make this method of charitable contributions a good idea.
Some charities also accept contributions of other appreciated property such as real estate, art and collectibles. In this case, you might need an appraisal to establish their value. Once you have that value, the tax treatment would be the same as on other investments you donate.
If you’re at least age 70½ and have a retirement account such as an IRA or 401(k), there’s another way you can snag a tax benefit on charitable contributions. Even though required minimum distributions (RMDs) from those accounts now must start at age 72, you can donate up to $100,000 of retirement plan withdrawals to qualified charities each year and avoid income tax on those distributions.
You won’t be able to deduct that amount when you file, but the donation could lower your taxable income enough to cut your costs for Medicare, which is based partly on your income. (This rule is has been in place for several years.)
Can you deduct your contributions?
Charitable contributions are still considered deductible expenses under the tax law passed in late 2017. However, an important change could hinder your ability to take any itemized deductions, including donations, when you file: As of 2020, the standard deduction increased to $12,400 for single filers and $24,800 for married couples who file jointly.
This means that if the total amount of your itemized deductions fall below these levels, you’re better off taking the standard deduction.
(Note that for 2020 only, you can deduct up to $300 in charitable cash contributions whether you itemize or not.)
Bunch ´em if you need ´em
One way to help ensure you’ll have enough deductions to itemize is to “bunch” them into a single tax year. For example, if there’s a particular cause to which you want to give lots of support, consider pushing up next year’s (and maybe beyond) contributions into this year. Or, you might delay this year’s donations into next year or the following (and wait to get your tax break then). If you can afford it, bunching several years’ worth of contributions into a single year can help you reap the donations’ full tax benefits.
What you can do next
Talk to your tax or financial professional about the most tax-efficient way to make charitable contributions for your situation, then plan ahead accordingly.
Footnotes
Roger Wohlner is a financial writer and advisor. His work has been featured in Investopedia, Yahoo Finance, Go Banking Rates, Morningstar, US News, and other publications. Roger writes extensively for various financial services firms, asset managers and financial advisors.
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