As the 2023 tax season comes to a close, it is time to start planning for the 2024 tax year. One important aspect of tax planning is maximizing your charitable donations. While charity should always come from the heart, there are ways to ensure that you are getting the biggest bang for your buck and saving on taxes when you give to charity. To receive a deduction on your taxes for charitable donations, you must itemize your taxes instead of taking the standard deduction. The Tax Cuts and Jobs Act of 2017 increased the standard deduction, making it more difficult for many people to itemize deductions. Most people can only itemize mortgage interest, charity, and up to $10,000 of property or state income tax.
One effective tactic for maximizing your charitable deductions is tax bunching. Tax bunching involves grouping your deductions in a way that allows you to itemize in certain years. By strategically timing the payment of property taxes and charitable donations, you can ensure that your deductions exceed the standard deduction. For example, if you pay $5,000 in property taxes and give $5,000 to charity each year, you may not have enough deductions to itemize. However, by paying your property taxes early in one year and delaying charitable contributions to the next year, you can bunch your deductions and exceed the standard deduction.
Another tip is to bunch the donations of your belongings to charity. By holding onto items you plan to donate until the following year, you can ensure that your deductions are high enough to itemize. Keeping good records and using a reasonable donation value when itemizing can help maximize the tax benefits of donating items to charity. Donor Advised Gift Funds are another useful tool for maximizing charitable deductions. These funds allow you to donate cash or appreciated assets to a third-party fund and take the deduction in the year of the contribution. You can then use the fund to make donations to verified charities over many years, potentially reducing your tax burden.
Using a donor advised fund is especially beneficial in years when you have an unusual increase in income, such as a large bonus or sale of a property. By contributing to a donor advised fund in a high-income year, you can significantly increase your deductions and potentially save on taxes. Additionally, donating appreciated assets to the fund instead of cash can help you save on capital gains taxes. While donor advised funds do have underlying fees, the potential tax savings often outweigh these costs. By utilizing tax bunching and donor advised funds, you can effectively maximize your charitable giving while reducing your tax liability.
These tactics require some forethought and planning, so it is essential to discuss your charitable giving strategy with your accountant or financial planner early on. By working with a professional to develop a tax-efficient giving plan, you can ensure that you are making the most of your charitable donations while minimizing your tax burden. Planning ahead and implementing these strategies can help you make a positive impact through charitable giving while also taking advantage of potential tax savings.
