You may donate money to charitable organizations throughout the year, for no other reason than your heart-felt desire to support causes that you care about. If philanthropy is important to you, keep in mind there are associated tax breaks that could potentially increase your ability to give. Consider a strategic approach to charitable giving, possibly as part of your year-end tax planning.
You can generally deduct charitable contributions, which reduces your taxable income, only if you itemize deductions on your federal income tax return. The deduction is currently limited to 60% of your adjusted gross income (AGI) for cash contributions to qualified charities. Otherwise, limits of 50%, 30% or 20% of AGI may apply, depending on the type of property you give and the type of organization to which you contribute. Excess amounts can be carried over in each of the next five years until used up, but not beyond that.
If you claim a charitable deduction for a contribution of cash, a check or other monetary gift, you should maintain a record of the gift made that includes the name of the organization, the date of the contribution and the amount of the contribution. You may use a cancelled check, a bank statement that shows the name of the organization, or a receipt or letter from the charity showing the name of the charitable organization, the date and amount of the contribution. Donations of $250 or more must be substantiated with a contemporaneous written acknowledgment from the charity. Additional requirements apply to noncash contributions.
Below are some strategies that may help enhance your charitable impact as well as your tax savings.
Bunch or time gifts and deductions
The Tax Cuts and Jobs Act roughly doubled the standard deduction beginning in 2018 and indexed it annually for inflation through 2025 ($14,600 for single taxpayers and $29,200 for joint filers in 2024).
If you find that the total of your itemized deductions for 2024 will be slightly below the level of the standard deduction, it could be worthwhile to combine or "bunch" 2024 and 2025 charitable contributions into one year, itemize on your 2024 tax return and take the standard deduction on 2025 taxes—or reverse the strategy if you think you will be in a higher tax bracket in 2025.
Utilize a donor-advised fund
Another way to bunch contributions or generate a large charitable deduction for the current year—possibly before you know where you want the money to go—is to establish a donor-advised fund (DAF). Donors who itemize deductions on their federal income tax returns may be able to deduct the entire DAF contribution in the year they are made, then later designate funds to the charities they want to support. DAF contributions are irrevocable, which means the donor gives the sponsor legal control while retaining advisory privileges with respect to the distribution of funds and the investment of assets. The amounts in the DAF are excluded from your federal taxable estate as well.
Donate from an IRA
If you are an IRA owner who is 70½ or older, you can give to a charity without itemizing and still get a tax break through a qualified charitable distribution (QCD). A QCD must be an otherwise taxable distribution from an IRA (generally, distributions from traditional IRAs are subject to federal income tax). QCDs are excluded from income and won't affect your federal tax obligation. At this time, if the account owner reached age 72 in 2023, Required Minimum Distributions (RMD) must begin no later than April 1, 2025. A QCD can satisfy all or part of your RMD. To make a QCD, you would direct your IRA trustee to issue a check made out to a qualified public charity. You may directly contribute up to $105,000 from your IRA for the QCD option. If you're married, your spouse may also contribute up to $105,000 from their IRA.
Strive for effective giving
Here's how you can help ensure that your donations are well spent. Give directly to the charity and check out their track record. An easy place to start is with the IRS at https://apps.irs.gov/app/eos. Individuals who call on the phone or knock on your door may be paid fundraisers, which can cut into the organization's proceeds. Even worse, they could be questionable groups posing as more reputable and well-known charities. When contacted by anyone on behalf of a charity, never give out personal information over the phone or in response to an email you didn't initiate. You can find information on public charities online.
Take advantage of "leverage" opportunities. A wealthy benefactor or corporation may offer to match private donations to a charity during a certain window of time. Many employers have charitable giving programs that match funds donated by employees to qualifying organizations.
Gifts to individuals who are in need typically are not deductible. Even if there is a GoFundMe page, unless it’s set up by a qualified charity, your gift is considered a personal donation and therefore not tax deductible.
DAFs have fees and expenses that donors giving directly to a charity would not face. Selling investments to make a charitable donation may cost you income tax, whereas a direct gift of the investment could eliminate the tax. If it’s a small charity, they may not be able to handle anything beyond a gift of cash. You may have to sign a distribution form and provide additional information for a QCD. And if you are gifting other than cash, make sure you consider the timeline involved to get the assets into the charity’s name. If you are gifting an investment like shares of stock or mutual funds, there may be a deadline earlier than December 31 to get it accomplished.
Your gifting options and amounts may change from year to year, based on your situation and changes in tax laws. It’s about more than your desire to help; proper planning based on your current and future financial situation should be given to any financial decision such as gifting.
The experts at Busey Wealth Management can help you plan for your financial future with holistic services and tailored solutions. To learn more, visit busey.com/wealth-management.
This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.