Jesus commissions His disciples in Matthew chapter 10 to serve the sick and the marginalized in society. His words to them are of selfless generosity, saying “Freely you have received, now freely give.” In the same way, we should generously and joyfully give out of our abundance to the Church and to organizations that are reaching out to others in need. The difference is that, in the present day, we may as well also take advantage of tax breaks to further our ability to be generous.
As with every aspect of our financial plan, we can be most effective with our resources when we use discipline and careful planning.
Tithes and offerings to church and donations made to qualified charities can generally be deducted from federal income taxes, so long as the taxpayer is itemizing their deductions. The realized benefit, therefore, varies by tax bracket and tax situation.
Let’s use a simple $100 gift to a qualified charity as an example:
For someone in the 24% tax bracket, deducting the $100 would result in a tax savings of $24. Therefore, the real cost to the donor is $76, even though the charity received $100. Similarly, someone in the 12% tax bracket would have a tax savings of $12 and a real cost of $88. Both examples assume that the donor is already itemizing their deductions on their tax return.
For this reason, households with variable incomes (such as business owners or commissioned salespeople) will oftentimes wait until the very end of the calendar year to figure their major charitable giving decisions. They can then estimate where they expect their income to end up, what their tax bracket will be, and where they are standing in comparison to their charitable giving and tithing goals. Given this, it’s no surprise that over 30% of all charitable gifts are made in the month of December!
CARES Act Special Charitable Deduction
In 2020, you can still get a tax benefit for some charitable giving, even if you do not itemize deductions. The CARES Act, which was passed in March 2020, allows for a $300 charitable deduction for those who claim the standard deduction. To be eligible, charitable contributions must be made in cash and cannot be made to a donor advised fund.
3 Tips for Efficient and Effective Giving
1. Donate Appreciated Assets
This is often one of the most overlooked tools for effective charitable giving. Gifting appreciated assets, such as publicly traded stock, often provides a double tax benefit, through deduction from income taxes in addition to an avoidance of capital gains tax.
Let’s say 100 shares of XYZ Corp. stock were purchased 5 years ago for $10 per share. The cost basis is therefore $1,000 in total. The stock price has since doubled and is now worth $20 per share, or $2,000 in total.
Now let’s say the owner of the stock intended to make a charitable gift of $2,000. If the stockholder sells the stock for cash they will be subject to capital gains tax—typically 15% of the gains, or in this case $150. The owner would then be left with $1,850 to put towards their goal of a $2,000 charitable gift.
This is inefficient.
Instead, the donor should transfer the stock directly to the qualified charity. The charity will likely sell the stock, immediately realizing $2,000 cash from the donation. The donor can deduct the full $2,000 donation without ever being subject to the capital gains tax.
Lastly, if the donor still wishes to own the same amount of XYZ Corp’s stock, they can simply go back and purchase $2,000 of stock at the current price of $20 per share. They are now effectively in the same cash position as if they would have simply written a check to the charity for $2,000, and they still own 100 shares of stock. The difference now is that they’ve raised their cost basis on the stock from $1,000 to $2,000. This will benefit them whenever they decide to sell in the future.
2. Start a Donor Advised Fund (DAF)
A donor advised fund is a financial vehicle that allows individuals to make a charitable contribution, realize the deduction immediately, and determine later what organization or church to actually give the money to. This is a convenient way to track generosity while allowing time to be very intentional about where the dollars go. One great option for opening a DAF is the National Christian Foundation on the basis of their Christ-centered focus, low fees, and user friendliness.
The Tax Cuts & Jobs Act that was passed in 2017 made it even more advantageous to utilize a DAF for a “bunching” giving strategy. To learn more about how to optimize your giving with this strategy, read this article.
3. Give Directly from an IRA
Individuals age 70 ½ with a required minimum distribution (RMD) can exclude from income up to $100,000 of gifts made from an IRA directly to qualified charities. The key benefit for gifting directly from an IRA is that it counts towards the individual's RMD. This, in turn, lowers the taxpayer's adjusted gross income (AGI) which is likely more valuable than a charitable deduction.
3 Reminders for End of Year Giving
1. Postmark by December 31
Donations sent by mail must be postmarked by December 31 to be deductible in the current tax year. A good alternative for those cutting it close is to give online before midnight on the 31st. Most qualified charities and churches have online giving right on their website.
2. Get a Receipt
Income tax regulations require substantiation for any gift of $250 or more. It is a good practice to always get a receipt and to store receipts together for tax purposes. This will prove handy when preparing taxes and in the event of an audit.
3. Your Time is Not Deductible
Volunteer time and transportation to and from the place of volunteering is generally not deductible. Other direct expenses, however, can be. Was a purchase made as a requirement of volunteering? Were you not reimbursed for travel while doing the volunteer job? Keep good records, as these expenses can likely be deducted.
Selfless generosity should always be our primary motivation. At the same time, being efficient and effective with our giving only allows us to be even more generous now and in the future. Tithing and charitable giving should be a central component, and not merely an afterthought, of a healthy financial plan. At Guide Financial Planning, we are eager to help you create a plan you are confident in so that you can give joyfully and generously! Schedule a free call to learn more today.
Note: Guide Financial Planning, LLC does not practice law or accountancy.
About Guide Financial Planning
Guide Financial Planning is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner™ and Certified Kingdom Advisor®. He has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.