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3 Smart Year-End Charitable Giving Strategies

When it comes to charity, about 30% of all donations will come in during the month of December. December is the magic month for several reasons: the holidays encourage us to help others, the rise of the #GivingTuesday social movement and of course, tax strategies. Overall, if you itemize your deductions, making charitable contributions can decrease your tax bill. Since high earners generally pay tax at higher rates, they may get a large tax benefit from charitable contributions. Below are ways to maximize these benefits.

1) Give appreciated assets as opposed to giving cash. Ramsay Slugg, Managing Director and Wealth Strategist in Bank of America’s Chief Investment Office, recommends giving appreciated assets for several reasons. “If you donate long-term appreciated assets like bonds, stocks or real estate to charity, you generally don’t have to pay capital gains, and you can take an income tax deduction for the full fair-market value.”

2) Qualified Charitable Distribution: Slugg says this has become commonly known as a Charitable IRA Rollover, and believes we’ll see more and more people take advantage of this giving strategy. Generally, a qualified charitable distribution is an otherwise taxable distribution from an IRA (with some restrictions and limits) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity, up to $100,000. This can usually count as your required minimum distribution. For those not itemizing, Slugg says this can be an especially smart strategy to use.

3) Bunching: This strategy has been around for a long time, but because of the tax changes last year it is gaining popularity. When individual taxpayers contribute by bunching donations, they combine multiple years of ‘normal’ annual charitable contributions into a single year. In the bunch year, the larger charitable contribution will increase the likelihood of exceeding the standard deduction and thus provide the taxpayers with additional tax savings.

For example, a married couple has a $10,000 cap on the taxes that they can itemize and they gave $10,000 in charity. They would have $20,000 in deductions which is less than the standard deduction so they woudn’t get any tax benefit by itemizing. If they plan to make a similar donation each year, an alternative is to bunch 4 years worth of donations this year for a total of $40,000 and itemize deductions. Then over the next few years they will not make any donations and take the standard deduction.

Slugg warns there are some potential issues that come with bunching. First, you must have discipline to be able to plan out your charitable giving over several years. Second, and perhaps more important, bunching can hurt charities because it causes disruptions and issues in their yearly planning and budgeting.

Slugg suggests another option is to use a donor-advised fund (or DAF). A DAF is a giving vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time. Donors can contribute to the fund as frequently as they like, and then recommend grants to their favorite charities whenever makes sense for them.

Dianne Chipps Bailey, Managing Director and National Philanthropic Strategy Executive of Philanthropic Solutions at Bank of America says that while there are obvious tax benefits, it’s important to understand that giving is not driven by taxes. “Certainly high net worth individuals will be tax efficient and strategic in the way they execute, but the #1 motivation to give is driven by the values and experiences of the donor.”

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