Charitable giving strategies to help maximize your tax benefit

Zach Gildehaus
CFA®, CFP®, CEPA, Client Needs Research

December tends to be the most common month for charitable donations. If you’re feeling charitably inclined this holiday season, here are a few things to know to help your donations go further and potentially help you save on taxes.

1. When can I deduct my charitable contributions from my income taxes?

To get a chartable income tax deduction, you must itemize your deductions, but it won’t always make sense to itemize even if you give to charity. To understand when it may make sense to itemize, it’s helpful to know:

• How is my taxable income calculated?
  Adjusted gross income (AGI) is your total income minus some adjustments such as contributions to your 401(k) or health savings account. Your AGI determines your eligibility for certain credits and deductions, which can lower your taxable income. How much you owe in taxes is based on your taxable income.
   
• What is an income deduction?
  An income tax deduction is an amount you’re allowed to deduct from your taxable income, which generally lowers the income taxes you owe.
   
• Standard deduction vs. itemized deductions
  When you file your taxes, you can claim a standard deduction or itemize individual deductions. The standard deduction is a standard amount available to everyone. Itemized deductions are based on expenses paid during the tax year, such as charitable donations, mortgage interest, state and local taxes, and unreimbursed medical expenses (all within limits).
   
• Which should I choose?
  The standard deduction is $13,850 for single filers or $27,700 for married filing jointly in 2023. If your itemized individual deductions exceed the standard deduction amount, you may owe less in income taxes by itemizing.

2. What impacts my charitable income tax deduction amount?

Your deduction amount is generally based on the fair market value of the asset or its basis — typically this is the amount you paid for it. You can generally get a dollar-for-dollar deduction for what you give to charity. That said, the total amount you can deduct may be limited by three factors:

• Your adjusted gross income:              
  The total amount of charitable deductions you can claim is limited to a percentage of your AGI. The higher your AGI, the larger the charitable income tax deduction you’d be able to claim.
   
• The type of asset you give to charity:
  Different types of assets carry different AGI limits. Cash typically has the highest income tax deduction limit, but other assets may offer other tax advantages that make them more attractive to give to charity.
   
• The type of organization you support:
  There are two primary types of charitable organizations you can support — public charities and private foundations. Generally, public charities have a higher deduction limit than private foundations.  

Note: If you give more than the prescribed limit, you can apply the extra amount in future tax years for up to five years.

3. What to consider when giving

When you want to give, how much and your other financial goals may impact your decision to give a particular asset to charity. For this reason, it’s important to take an integrated approach. Below are a few common assets people give and their considerations.

• Cash is easily transferable and readily accepted, but it may not provide the largest tax benefits. It’s also important to ensure you have enough cash on hand to meet your spending needs and maintain an emergency fund.
   
• Giving appreciated assets such as a stock that has increased in value can allow you to eliminate the capital gains tax — the tax levied against the increased value of these assets upon their sale — as well as get the income tax deduction. That said, giving appreciated securities may throw your portfolio out of alignment and require rebalancing that could cause other taxes or transaction costs.
   
• Qualified charitable distribution (QCD) involves donating a portion of a traditional individual retirement account (IRA) or Roth IRA directly to a charity and is an option if you are at least 70½ at the time of the distribution. QCDs can offset required minimum distributions (RMDs) — a minimum amount you are required to withdraw from your traditional IRA starting at age 73. The amount of the QCD is not included in adjusted gross income, thereby allowing you to not recognize the income or pay the associated taxes you otherwise would have had you received the RMD.

4. What assets are not ideal to give

These three types of assets generally have less favorable tax treatment when given to charity:

• The income tax deduction for tangible personal property such as jewelry or works of art that are sold by the charity in the same tax year it was donated is limited to your basis versus what it was worth when you donated it.
   
• The income tax deduction for ordinary-income property such as inventory, personal works of art or securities you’ve held for one year or less are generally limited to your basis versus what it was worth when you donated it.
   
• When donating property that has gone down in value such as a stock, your tax deduction is limited to its current value. It may be better to sell the security, donate the proceeds and use the realized loss to offset other taxable gains.

Charitable giving can be a complex decision. Work with a qualified tax professional to determine the potential impact to your taxes. An Edward Jones financial advisor can illustrate how giving to charity may impact your overall financial strategy and meet your charitable giving goals.

Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation. This content should not be depended upon for other than broadly informational purposes. Specific questions should be referred to a qualified tax professional.