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What You Need to Know About Charitable Giving

December 6, 2019

More than half of all Americans donate to charity each year, and the average amount donated is over $2,500. If you donate to charity throughout the year, you need to make sure you’re doing it in the most tax-efficient way possible. What do you need to know before you donate your money or clothes, furniture, and other possessions to a charity?

Remember the standard deduction

Ever since the standard deduction significantly increased with the Tax Cuts and Jobs Act of 2017, less and less people itemize deductions. It’s projected that only about 10% of Americans itemized last year. The standard deductions for 2019 are $12,200 for single filers and $24,400 for married taxpayers filing jointly. This means that unless your itemized deductions (including charitable contributions) are more than the standard deduction, you’ll be taking the standard deduction.

If you are like most Americans, your charitable giving won’t impact your tax bill. Just because you won’t get an extra deduction doesn’t mean you shouldn’t give, though. Charitable giving in 2018 experienced the largest decline since the Great Recession due to the changes in the tax code, so charities need your contributions now more than ever.

If you are in the roughly 10% of Americans who still itemizes, there are several different strategies you can deploy to make sure you are giving in a tax-efficient way. If you don’t itemize your deductions but do have required minimum distributions (RMDs), skip down to the qualified charitable distributions (QCD) section to learn more about how you may be able to lower your tax burden through charitable contributions without itemizing.

Goodwill or eBay?

When cleaning the clutter in your home, it may be easier to donate items to Goodwill or the Salvation Army rather than sell it on eBay. Both Goodwill and the Salvation Army have a donation valuation guide, so you’ll know how much you can deduct when tax time comes around.

It’s less time-consuming to drop stuff off at a donation center, too. If you choose to sell your clutter online, you’ll be responsible for taking pictures, listing the item, shipping the item, and providing customer service to buyers. You might also be responsible for paying taxes on money you make from selling your clutter online. If you do itemize your deductions, donating your unwanted goods to charity may be better than selling them online.

Charitable gift funds

Charitable gift funds, or donor-advised funds, are charitable investment accounts for the sole purpose of giving to charity. Donating long-term appreciated assets, such as stocks or bonds, could help to reduce your tax burden and give more money to charity. Using a donor-advised fund can also keep things simple. Making all of your charitable contributions through one account makes it much easier to keep track of contributions throughout the year, and know exactly how much you gave come tax time.

Qualified Charitable Distributions (QCDs)

Even if you are unable to itemize charitable contributions, you may be able to pay less in taxes by using qualified charitable distributions. QCDs allow you to gift all or a portion of your required minimum distribution (RMD) to a qualified charitable organization. If you don’t need the RMDs, or if you were going to give money to charity anyway, they can be a great way to reduce your tax liability. QCDs reduce your taxable income, therefore reducing your tax burden. Reducing your taxable income may also have other positive benefits, such as reducing your Medicare premiums.

You should give even if it doesn’t financially benefit you

If you don’t itemize your deductions or have any RMDs, you may not get anything back financially from giving to charity. That doesn’t mean you shouldn’t give. Studies have found, time and time again, that giving money away brings joy to the giver. Charitable giving also contributes to the betterment of society as a whole, helping to make the world a better place.

Charitable giving is something that will never be “worth it” financially. You may be able to save money on taxes through deductions or by lowering your taxable income, but you would always be better off financially if you didn’t give anything to charity. The non-financial benefits of giving money to charity must not be overlooked; giving makes people happier, and you have the ability to change the world in meaningful and significant ways by supporting charities.

It’s important to make sure you are giving in the most tax-efficient way possible, but it’s even more important to focus on the true reason for giving, and it isn’t for your own financial benefit. Giving is about helping others in need who are less fortunate, and making someone’s life a little brighter.

For even more ways to make your life more tax-efficient, check out our most recent show: “How to LEGALLY Avoid Paying Taxes This Year.”

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