By Claire Williams
Saving money can come in many different shapes and sizes. One approach can be making charitable donations in order to receive a tax deductible.
Although charitable donations can still be a good approach to saving money, the regulations have evolved in the last year, says Brien Smith, founder and owner of Traditions Wealth Advisors.
“This year the standard amount of tax deduction for a married couple is $24,000,” says Sarah Buenger, director of financial planning at Traditions Wealth Advisors. That’s almost double what it used to be.
This increase in one area of tax deductibility causes a decrease in another. A lot of automatic tax deductions have been taken away in order to raise the standard deduction amount, explains Smith.
There are also some regulations for the process of itemizing charitable donations. If donating direct money, it is good to use a check so there is documentation. Additionally, donors to places such as Goodwill should hold onto the receipt to prove the donation, Buenger says.
A popular strategy is making a qualified charitable donation, or QCD, says Smith. Retired individuals tend to take advantage of QCDs in order to lower their amount of taxable income. By donating money directly out of a retirement fund, an individual keeps his income in a lower bracket, which equates to a lower rate of income tax.
Retirement funds play a significant role in planning charitable contributions. Without a sufficient retirement fund, an individual should refrain from charitable donations in order to better prepare for their future.
“It is rare that we advise against charitable contributions,” says Smith. The firm does not encourage it only if it is a risk to a client’s retirement fund, or if they aren’t charitably inclined, which does not happen often, Smith says.
Qualified charity donations must abide by certain regulations, says Buenger. Each charity must be certified as a 501(c)(3) organization, which is an IRS code that outlines the qualifications the charity must meet. The IRS keeps a list of 501(c)(3) charities, which they update each year, Buenger continues. Private charities on the other hand, have separate restrictions.
A newly developed restriction affects Texas A&M University donors. Although in the past donating to the university with the intention of earning season tickets has qualified as a charitable donation, it no longer does, says Smith. Only donations to Texas A&M that are not tied to any sport-related cases can qualify for tax exemption.
Another type of gifting that can be beneficial is the gifting of appreciated assets, such as stocks. Gifting stock ownership at fair market value allows for the giver to escape paying capital gains tax on the stocks, explains Buenger.
In order to get the most out of tax deductions, “charitable clumping” can be a beneficial approach. By clumping, an individual can group their itemized deductions into one year, in order to meet a certain threshold for tax exemption, Smith says. For instance, saving a big surgery or getting braces or glasses all for one year can be a strategic method. This can also apply to real estate taxes. Each year, the deadline for paying property taxes fluctuates from October of one year to February of the next. This allows for an individual to postpone paying taxes to their clumping year, which helps them to save more through tax deductions.
“Charitable donations are still a good way to go,” says Buenger. They simply should be approached in a thoughtful and strategic way in order for an individual to benefit the most.
