When the standard deduction was nearly doubled in 2018 (in 2020, it's $12,400 for individuals and $24,800 for married couples filing jointly), it took away some of the tax incentives of charitable giving. Donations to charities are considered itemized deductions, so taxpayers have to have itemized deductions exceeding the $12,400 or $24,800 before they can reap tax benefits from charitable giving. And for most Americans, that's a high threshold to cross.
But that doesn't mean you should stop giving to charities or that you should forget about getting any tax breaks for your generosity. Westley mentions two ways that you can plan ahead to maximize tax savings.
The first and most popular method is to bundle your charitable donations. Let's say you normally give away about $5,000 a year. That's very generous, but well below the $12,400 individual threshold for itemizing deductions. Instead of giving away $5,000 a year for the next three years, why not save up that money and made one big $15,000 donation every three years? That way, you can at least reap some tax benefits every three years instead of never.
So, if you're thinking about making a bunch of end-of-the-year donations, consider putting that money away and bundling your donations next year.
The second method is for a different scenario. Let's say you have a really spectacular year financially, or you inherit a nice chunk of money. You'd like to donate a larger-than-normal amount to charity, but you need some time to figure out the best charities to support. That's where donor-advised funds come in.
A donor-advised fund is like an investment account for charitable giving. You invest money or other assets in the fund that you want to one day donate to charitable organizations. The money then grows until you're ready to take it out and make the actual donations.
The tax benefit of donor advised funds relates precisely to the situation we outlined above: You have a significant chunk of money you want to one day donate to charity, but you're not ready to divvy it out quite yet. When you invest that money in a donor-advised fund, the full amount is immediately considered tax-deductible, even if it's not distributed to the charities until years later.
So, if you're lucky enough to be sitting on $25,000, you can immediately put that in a donor-advised fund to exceed the itemized deduction threshold and worry about picking out the charities later.