Whether it's bundling your donations in one year rather than over two, or figuring out the right year to start making major donations, there are some strategies to maximize the tax benefits of your major donations.

The 2018 Tax Cuts and Jobs Act (TCJA) dramatically changed the standard deduction and altered what could be itemized through 2025. Many people have found that they are no longer able to itemize deductions. For those that have been charitably inclined, they now find that their charitable giving no longer has as much, if any, of a tax-reducing impact. While for most givers, the tax benefit was not the sole reason they gave, it’s still a loss and many people are finding themselves disappointed that their gift doesn’t give them a charitable deduction anymore.

The deduction change was mainly two-fold. The Minnesota state tax deduction for income, property tax, and car tabs has remained capped at $10,000. For married working couples in Minnesota, this became a huge reduction in their itemized deduction. The other big change was the increase in the standard deduction, which continues to increase due to inflation adjustments. In 2023, the single filer deduction bumped to $13,825 while the married filer deduction rose to $27,650. As a result, many people found they took the standard deduction in 2018 for the first time in years, and that their charitable giving did not reduce their taxes. In fact, over 90% of taxpayers have only been able to claim the standard deduction since 2018 since they simply don’t have enough write-offs to make itemized deductions worthwhile anymore.

Even with all of this, there are some possible workarounds:

1. STACK CHARITABLE DEDUCTIONS

If your charitable gifts will not reduce your taxes because you will take the standard deduction, then consider stacking your charitable gifts all in one year. For example, if you normally give $7,000 per year, then stack your gift for three years and give $21,000 in year one and nothing in years two and three. That will allow you to use itemized deductions in year one and receive a tax-reducing benefit of your charitable contributions. In the other two years, you will simply use the standard deduction. An example of a married couple filing jointly is below:

2. USE APPRECIATED ASSETS 

You might find it difficult to come up with the cash flow to give to charity three years' worth of gifts at one time. You could save and wait until the third year to give, or you could give appreciated assets. When you give appreciated assets, you avoid selling the asset and paying the capital gain. Instead, you give the charity the asset intact and when they sell, they do not have to pay the capital gain if they are a 501(c)(3)  organization. However, you potentially receive the full tax deduction of the gift that was made.  

3. CONSIDER A DONOR ADVISED FUND

One concern about giving three years' worth of donations to a charity all at once is that the charity might expect that same gift every year. It might be difficult for that charity to manage its budget when it receives irregular donations. A Donor Advised Fund (DAF) can solve that problem. A DAF is a public charity that could be with a community foundation or associated with a brokerage firm. The donation to the DAF is considered a charitable gift and is your gift for tax purposes. The DAF will open an account in your name from which you can then grant dollars to your favorite 501(c)(3) organizations.  So you could gift three years' worth of cash or appreciated assets to your DAF, then grant your normal amount each year for three years to your favorite organizations. You receive the tax-reducing benefit of stacking your donation, and the charity receives your regular contribution each year, smoothing out its budget.

4. GIVE DIRECTLY OUT OF YOUR IRA 

If you are over the magic age of 70 ½, which is when the IRS allows you to give funds, up to $100,000 annually, directly from your Individual Retirement Account (IRA) to charity. (Note that while 59½ is the age in which you are allowed to withdraw funds out of your IRA without taxes or penalties, you are not yet able to make charitable donations directly from your IRA). If you are over the age of 73, this has the added benefit of also being counted toward your annual Required Minimum Distribution (RMD). This strategy reduces your total income so that you are taxed less. See below for an example of the tax savings.

*Note, in this example, only 85 percent of the couple’s Social Security is taxed.

We all give for different reasons. We may want to help a community, see a wrong righted, or give back to a cause that has given much to us. Whatever the reason, it’s lovely when we can get a little bit of a tax reduction in return. The above strategies may help you find a way to accomplish that even in our new tax environment.