How to optimize your tax deductions through charitable donations

• Since 2018, claiming a tax break for charitable donations has become more difficult due to stricter rules for itemizing deductions.
• Qualified charitable distributions may be a suitable option for older investors looking to transfer funds from their pre-tax individual retirement accounts to charitable organizations.
• A donor-advised fund functions like a charitable checkbook, allowing others to give appreciated assets.

Experts suggest that certain gifting strategies can increase your tax break as the year-end approaches and you consider making a donation to charity.

In 2023, U.S. charitable giving increased by 2% to $557.16 billion, while Giving Tuesday 2023 saw a total of $3.1 billion in donations, according to the annual report from Indiana University Lilly Family School of Philanthropy and GivingTuesday Data Commons.

During this season, charitable giving is the focus, and many individuals aim to make the biggest impact possible, according to Paula Nangle, a certified financial planner and president and senior wealth advisor at Marshall Financial Group in Doylestown, Pennsylvania.

Before making a charitable donation, it's important to understand the tax implications, according to financial advisors.

How the charitable deduction works

When filing taxes, you can choose between claiming the standard deduction or your total itemized deductions, which include tax breaks for charitable gifts, medical expenses, and state and local taxes, among others.

The Tax Cuts and Jobs Act of 2017, enacted by President-elect Donald Trump, nearly doubled the standard deduction and capped SALT at $10,000 through 2025.

Those changes make it harder to itemize, Nangle explained.

In 2024, the standard deduction for single taxpayers will be $14,600, while married couples filing together will receive a deduction of $29,200. Approximately 90% of filers utilized the standard deduction in 2021, according to the most recent IRS data.

Experts suggest that there are tax strategies to surpass or evade the standard deduction, they say.

Qualified charitable distributions are a 'no-brainer'

A qualified charitable distribution (QCD) is typically the most tax-advantaged option for individuals aged 70½ or older with pretax savings in an individual retirement account.

In 2024, the maximum amount that can be transferred from an IRA to an eligible nonprofit through QCDs is $105,000 per individual, an increase from $100,000 in previous years.

Medicare Part B and Part D premiums are not affected by charitable deductions, but higher AGI can impact IRMAA.

Retirees can fulfill their yearly required minimum distributions by taking a QCD, as per the IRS. From 2023, most individuals must begin taking RMDs from their pretax retirement accounts at age 73.

CFP Juan Ros, a partner at Forum Financial Management in Thousand Oaks, California, stated that the QCD is an easy decision.

Consider 'bunching' donations

You can consider "bunching multiple years of contributions" into a single year if your itemized tax breaks don't exceed the standard deduction, Nangle said.

An alternative way to give to charity is by establishing a donor-advised fund, which is an investment account that allows for future gifts to nonprofits while providing an immediate tax deduction for transferred assets.

A donor-advised fund can be funded with appreciated stock, which provides a tax break and avoids capital gains tax forever, according to Ros.