New Year Philanthropy: Tax Considerations
“Give something, however small, to the one in need. For it is not small to one who has nothing. Neither is it small to God, if we have given what we could” (St. Gregory Nazianzen).
Is giving more to charity on your list of goals for 2024? After the hustle and bustle of the holiday season—including the overwhelming consumerism that can plague it—changing our focus to giving to others might be just the right tone we need to set for 2024. While many try to finish their giving before the end of the year, sometimes, it just doesn’t happen. Why not get ahead of the curve for 2024 and make your plan now?
While I do believe we should give regardless of incentives, it is good to be aware of the tax advantages of charitable donations. There are a number of opportunities to leverage your giving and possibly be able to give more because you end up paying less in taxes. Below are a few ideas or concepts that might be worth bringing up with your CPA or financial adviser to see if they would work for you.
This is by no means an exhaustive list—simply some ideas to consider as you discern where God is calling your family to give financially.
Itemize Your Taxes
Do you itemize your taxes or use the standard deduction? The 2017 Tax Cuts and Jobs Act drastically increased the standard deduction amounts, leading most individuals to use the standard deduction rather than itemize their taxes. For 2024, for a single individual, the standard deduction is $14,600. For married couples filing jointly, it is $29,200.
This means for it to make sense for a single person to itemize their taxes, they would need to have over $14,600 in itemizable deduction expenses. These expenses include (but are not limited to) mortgage interest, state and local income taxes, property taxes, and qualified charitable donations. Many people will not hit $14,600; however, if you are charitably inclined and tithe a portion of your income, you may come closer than you think, particularly if you also bought your home recently and have a higher interest rate on your mortgage.
Be sure to talk with your tax preparer and keep track of all your charitable giving. You might be surprised to learn that you will save money on your taxes by keeping good records and itemizing. The beginning of the year is the perfect time to start keeping good records rather than trying to pull them together in hindsight.
Bunching Your Donations
Maybe you are close to the standard deduction but not quite there or just over it. In this case, bunching your donations might make sense. This is a technique where you make all your donations for two years within a single year, with the first year’s worth happening in the beginning of January and the second happening in December. Typically, this approach does not affect the charity/charities too much, because they will still have the funds within a month of when they expect them.
For example, say you typically give $5,000 to a charity each December. If you decide you would prefer to bunch your donations for 2025, you would wait to give until January of 2025, when you would give the $5,000. Then, when December 2025 rolls around, you would give another $5,000. This schedule would give you $10,000 of charitable giving in 2025 rather than $5,000 in 2024 and $5,000 in 2025, possibly giving you enough deductions to itemize in 2025 and benefit from those tax incentives.
What if you typically give monthly? You could still take advantage of this technique by transferring your monthly gift into a savings account and then making the gift from that savings account in the appropriate year. You may want to check with the charity before making this change to be sure that it will not impact them too much from a cash flow perspective. Depending on the size of the charity and the size of your gift, it may or may not be a big deal to them.
Donor-Advised Funds
According to Fidelity Charitable, “A donor-advised fund, or DAF, is like a charitable investment account for the sole purpose of supporting charitable organizations you care about.” How does it work? You donate to (or fund) the donor-advised fund and are able to take advantage of the tax write-off in the year you make the contribution. The funds are invested and grow tax-free. Anytime you are ready, you can make a gift from the fund to support the qualified charity you want to support.
DAFs give you the ability to save and make larger gifts in the future while recognizing the donation for tax purposes now. They also allow you to invest and grow your money tax-free, so you have more money to donate. (The money put into these accounts must be donated. You are not able to take it out and use it for yourself.)
Gifting Appreciated Stocks
Do you have stocks with large capital gains? Maybe company stock in which you have a low-cost basis and on which you will owe lots of taxes when you want to use the money? Did you know you can donate stock and not have to pay capital gain taxes on it?
When you purchase a stock, your cost basis is the price you bought the stock for. When you want to use the money the stock is worth, you have to sell the stock. You’ll have to pay capital gain taxes on any money the stock has earned when you sell it.
For example, if you buy a stock for $10 and sell it in three years for $15, you will owe between 0% and 20% (depending on your taxable income) on the $5 gain for taxes. At 20%, this is $1 for every $5 the stock earned.
Want to avoid paying this tax? You can donate the stock. For example, if you are planning to make a $1,000 donation, and you have $1,000 worth of stock that you purchased for $700, you could donate the $1,000 of stock instead and save up to $60 in taxes. ($300 capital gain at 20% = $60).
The charity will not have to pay tax on the capital gain, and you still get to take the full $1,000 as a tax deduction if you itemize. You can then use the $1,000 that you were going to donate anyway to pay back your investment portfolio and set your cost basis back to $1,000 with either the same stock purchase or a new purchase (depending on where you want to invest it).
You do need to make sure the charity you are donating to is able to accept appreciated stock. If not, you could set up a donor-advised fund, donate the stock to the fund, and then make the donation from the fund.
As you can imagine, this process can be complicated. It is important to consult a professional to be sure everything is done the right way and will have the results you expect.
Tax Credits
Finally, if you live in a state that has state income tax, be sure to look into state tax credits for charitable giving. For example, Colorado has a number of state income tax credits for donations made to specific charities. As you research these policies, be sure to check the percent the credit is for and whether there is a maximum amount of money you can receive.
There were over 9,500 charities on the list for the Colorado tax credit programs in 2023, including a number of Catholic nonprofits like Catholic Charities and Camp Wojtyla. It is worth the time to research. My family was surprised to find some of the charities we already give to were on the list.
January is a great time to reevaluate your budget. Make sure giving is part of it. As we prepare for 2024 and ask God what He might be calling us to this year, take some time to pray about your charitable contributions. Where is God calling you to give? How is God calling you to give? Could you give more if you didn’t have to pay taxes on the gifts?
I pray you and your loved ones have a beautiful 2024.
Erica Mathews is a CERTIFIED FINANCIAL PLANNER™ Professional with Financial Counseling Associates, a small, family owned, independent, financial planning and investment management firm. She is passionate about helping families and individuals build their wealth so they can live out the calls God has placed on their hearts. As a wife, mom of four, and businesswomen, she understands the complexities of family life and helps relieve the burden of financial stress with organization, a plan, and automation so her clients hit their goals. She lives in Colorado with her husband and four kids. They love everything outdoors including gardening, hiking, biking and simply exploring nature. If you would like to reach out to Erica, her email is erica@fca-inc.com.