Donating to a nonprofit that works for a cause you believe in can be rewarding in and of itself. But the U.S. government wants to give you more for your charitable contributions in the form of a tax deduction. Getting the most out of that tax deduction leaves more money in your pocket to give more or save for other goals.
Here are three ways you can maximize the impact of your donations on your annual tax return.
1. Batching your donations
When the Tax Cuts and Jobs Act passed in 2017, it "simplified" taxes for many households by increasing the standard deduction. The result is a lot fewer citizens itemize their tax deductions today. But to get a tax break for your charitable donations, you typically need to itemize.
One way you can make the most of the bigger standard deduction is by alternating the years in which you give to charity with the years you take the standard deduction. If you usually donate at the end of every year, you may wait until January one year before donating again in December of the same year. That allows you to double your annual contribution, giving you a larger amount to itemize on your tax return.
You may want to batch multiple years' worth of donations in a single year. Perhaps you received a big windfall this year and are looking for a way to mitigate your tax bill. You could donate a large portion of that all at once and receive the tax deduction this year, and then take the standard deduction in each of the next few years.
By batching your donations, you can make itemizing worth it in the years you contribute to charity.
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2. Donate stock
If you have a few stocks that have gone up in value, you may want to donate a few shares to charity. If you opt to donate appreciated stock, you can avoid paying capital gains taxes on the shares. At the same time, you'll be able to deduct the full value of the shares at the time you donate them.
This strategy is like getting a two for one. If you otherwise sold the stocks in your brokerage account, you'd have to pay capital gains tax. That's a 15% reduction on the gains of your stock sale, for most people. And that means a 15% reduction in your deduction, as well.
Even if you end up taking the standard deduction, you can still benefit by donating appreciated assets. Since you won't have to report any of the capital gains on the sale of the stock, it may allow you to donate more than you would otherwise.
3. Donate straight from your IRA
Retirees over the age of 70 1/2 can get the best of both worlds by donating directly from their IRAs using a qualified charitable distribution, or QCD. When you make a QCD, you transfer funds directly from your IRA to a nonprofit -- the money never touches your bank account.
Importantly, QCDs count toward required minimum distributions, which will start at age 72 for most readers. So if those required distributions become a burden, forcing you to withdraw more than you need, a QCD may make sense to reduce the amount you have to withdraw for yourself.
Also, unlike most distributions from a traditional IRA, the amount of your QCD doesn't count as taxable income. That means you can make the donation and essentially get a tax break for it, and then you can still take the standard deduction since you don't have to itemize the QCD amount.
Donation season is coming up
While you may donate to a list of nonprofits every year, it's probably worth your time to do a little extra planning on how you make those donations. If your itemized deductions barely exceed the standard deduction, consider batching and donating appreciated stocks to get the most out of your donations. If you're a retiree dealing with big required minimum distributions, use a qualified charitable distribution.
Spending a little time to plan your donations can give you a lot more to spend on the things you care about.
