Written by Alex Seleznev, MBA, CFP®, CFA | Oct 25, 2023
This is the time of year when many people are considering supporting their favorite charities and causes. This is great and it certainly wouldn’t hurt to also save on taxes.
Let’s start with the basics. If you plan to support many charities with relatively small donations, you don’t need to complicate your life. Donate cash and keep the receipts for your tax preparer.
Are you required to take annual required minimum distributions (RMD)?
Consider donating a portion of your RMD to charities. This is one of the most tax-efficient ways to give.
It can be more complex than this, but here's a simple example. Assume you pay 25% in taxes and your RMD is $50,000. If you give $10,000 of your RMD to charities, you can save $10,000 x 25% = $2,500 in taxes.
Do you have stocks that significantly appreciated in value?
You can donate these stocks directly to charities and potentially deduct the donation.
What makes this strategy even more appealing is the fact that you don’t have to sell these stocks which will eliminate potential capital gain taxes.
You may benefit from donating appreciated stock even more if you “bunch” your contributions in one year. The idea is to maximize your itemized deduction in the year of contribution for maximum tax benefit.
Finally, for those who want to give significant amounts but haven’t decided on the list of charities yet, consider creating a Donor Advised Fund (DAF).
The DAF is usually funded with appreciated stock. You get to deduct the entire amount in the year of contribution, but you can decide what charities will receive the funds in the future.
To make this option even more appealing, you can invest the funds inside of the DAF if you don’t plan to donate the contributed funds for a while.