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Maximizing your charitable donations before year-end: A tax-savvy guide

Read time: 6 minutes (approx. 830 words) 

As another year begins drawing to a close, many individuals and small business owners start to reflect on their charitable giving. Contributing to causes you care about not only supports your community and passions but can also offer significant tax benefits. By maximizing your charitable donations, you can make a meaningful impact while potentially reducing your tax liability.   

Let’s look at some practical strategies for optimizing your charitable contributions so you can maximize your tax benefits before year-end. 

Understanding charitable contributions 

A charitable contribution is a donation made to a qualified organization, typically recognized as a 501(c)(3) entity by the IRS. These organizations include charities, churches and educational institutions that use donations to further their missions.

Tax deductions overview 

When you donate to a qualified charity, you may be eligible for a tax deduction. This deduction can lower your taxable income, which means you pay less in taxes. To benefit from these deductions, you must itemize your deductions on Schedule A of Form 1040. You’ll want to keep this in mind since the standard deduction may be the better option for some taxpayers. 

Strategies to maximize charitable donations 

Donate appreciated assets 

One effective strategy is to donate appreciated assets, such as stocks, bonds or real estate. When you donate these assets, you can generally avoid paying capital gains taxes on the appreciation. Additionally, you can claim a deduction for the full market value of the asset, maximizing both your charitable impact and tax benefits. 

Bunching contributions

Bunching contributions involves consolidating your charitable donations into one year rather than spreading them out over multiple years. This strategy can help you exceed the threshold for itemizing deductions in a single year, allowing you to maximize your tax benefits. Here’s where this strategy makes the most sense: 

  • Your deductible expenses are usually close to the standard deduction each year. 

  • You anticipate a lower future income due to retirement, career change or family changes. Bunching deductions this year can reduce taxable income should you find yourself in a higher tax bracket. 

  • You expect unusually high income this year from bonuses, investment gains or other sources. 

  • You foresee significant changes in other deductible expenses like medical costs or state and local taxes.

Donor-advised funds (DAFs) 

A donor-advised fund is a philanthropic account that allows you to make a charitable contribution, receive an immediate tax deduction and then distribute the funds to charities over time. Here are a few ways to look at it: 

  • You can grow charitable dollars tax-free by investing in your DAF, thereby increasing available funds for future grants. 

  • You can manage the timing of deductions and plan for future donations, even though the contribution to the DAF can be deducted in the year you give. 

  • You can lower your tax liabilities in windfall years because DAFs allow you to pre-fund future charitable contributions.  

Important considerations 

Record keeping 

Proper documentation is crucial when making charitable donations. The IRS requires a written acknowledgment from the charity for any donation over $250. Make sure to keep receipts and records of your contributions—they will be necessary if you’re audited. 

AGI limitations 

Be aware of the adjusted gross income (AGI) limitations on deductions. Generally, you can deduct contributions up to 60% of your AGI for cash donations and 30% for appreciated assets. However, recent legislation, such as the CARES Act, has provided temporary relief for some AGI limitations, so you’ll want to check with your tax advisor for the latest information and updates. 

Qualified Charitable Distributions (QCDs) 

If you are 70 ½ years old or older, consider making qualified charitable distributions directly from your IRA. QCDs allow you to donate up to $105,000 each year without counting the withdrawal as taxable income. 

Common mistakes to avoid 

Overestimating fair market value 

One common pitfall to avoid is inflating the fair market value of donated items. Be cautious when estimating values, especially for non-cash donations that exceed $5,000, which require a qualified appraisal. You’ll want to make sure you use accurate valuations to avoid issues with the IRS. 

Missing deadlines 

Make sure your donations are made by December 31 to qualify for the current tax year. If you’re mailing checks, remember the postmark rules—your donation must be postmarked by the deadline to be considered timely. 

Wrapping it up…before year-end 

Maximizing your charitable donations before year-end can provide significant tax benefits while allowing you to support causes that are near and dear to you. By understanding the rules and strategies, you can make informed decisions that enhance your giving experience. If you have questions or need help tailoring any of these strategies to your specific financial situation, our team of tax professionals is here to walk you through it all. With careful planning and strategic giving, you can make a lasting impact while optimizing your tax benefits. Happy giving! 

For additional information on charitable contributions, check out these pages on the IRS website: