Four Strategies to Optimize Your Charitable Giving This Holiday Season

One of my favorite parts of the holiday season? People are just more generous. And let’s face it: It feels good to give! Not only does your year-end charitable donation certainly help others, but research has shown the giver benefits as well — everything from reduced anxiety, improved physical health, and an increased sense of happiness. 

Yet, charitable giving is a lot more than just walking up to a Target and putting a buck in a Salvation Army kettle. Because while we certainly have the desire to help those in need, it’s also nice when we can achieve that generosity while also helping ourselves.  

The U.S. has a long history of incentivizing charitable donations, going all the way back to the Revenue Act of 1917, the first time the IRS allowed an individual income tax deduction for such a donation. It was the government’s way of encouraging generosity amidst rising income tax rates to pay for World War I. Today, ongoing law changes continue to impact how we give, as Daniel Hungerman, a professor in Notre Dame’s Department of Economics, opines: 

“Public policy affects charitable activity and behavior, and tax policies really do matter when it comes to taxpayers’ generosity.” 

In fact, the 2017 Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction, which had the ripple effect of reducing the annual charitable giving from individual donors by an estimated $20 billion the following year. 

So, how do you continue to give to charity while getting the most bang for your buck? These four strategies could be the answer. 

1. Appreciated stock donation

Stock can be especially valuable, including as a vehicle for charitable giving. If you have appreciated shares – defined as stock that’s increased in value since you originally purchased it – you can increase the value of what you’re donating and give yourself a break as well. 

Here’s an example: Say you purchased some stock and originally paid $10,000, but it’s done really well and now it’s worth $100,000. If you donate those shares, not only is the charity receiving the $10,000 just as if you’re writing a check for that amount, but you won’t pay capital gains on that amount. (The fine print: You need to have owned that stock for at least 12 months to realize the benefit.) 

2. Bunching

One way many people have navigated around the effects the 2017 tax law change is by “bunching,” a strategy that combines your charitable donations for two years into a single year as a way to get the most from your itemized deduction in the year in which you make the donation. 

Basically, it helps you clear the high standard deduction bar more easily, while also allowing you to still meet your charitable giving goals. Keep in mind, however, that if your donations don’t exceed the itemization threshold by a significant margin, the practice may not be worth it, so talk to your MN Wealth advisor for guidance. 

3. Donor-advised funds

The fastest-growing vehicle for charitable giving is the donor-advised fund, which is basically a charitable investment account specifically for supporting your chosen nonprofit. 

By donating your appreciated stock to one of these funds, you can continue to own that stock – you can sell it, diversify it, etc. – but still realize all the tax breaks of donating it. Even if the stock depreciates while it’s in the fund, you’re not penalized. 

4. Qualified charitable distribution (QCD)

As many individuals approach retirement age, we have to contend with the required minimum distribution (RMD) rule for our IRAs and 401(k) accounts. Currently, beginning at age 73 is when you’re required to take a certain amount of taxable income from these accounts every year. For anyone with a large IRA, that can mean a big tax bill. 

Instead, the RMD can fund what’s known as a qualified charitable distribution (QCD) to avoid paying taxes on what would otherwise be a taxable distribution. In fact, the QCD amount is simply excluded from your taxable income for that year. You must be at least 70½ at the time the distribution is made, but a QCD can be made even if you’re still under age 73 and not yet subject to RMDs. The IRS does adjust the maximum amount you can distribute to keep up with inflation, so the max amount for 2025 will increase to $108,000. 

This is a great way to use that RMD to help you meet your charitable giving goals without getting hit with the often-large tax bill that can accompany such a distribution. Plus, if you’re working with us at MN Wealth Advisors, we’ll create documentation you can take to your CPA that validates the nonprofit of your choice and tracks the donation for tax purposes. 

Be a good giver and a good steward 

All of the above are truly win-win strategies: After all, not only do they allow you to continue helping those in need, but they allow you to save on your tax bill. And if you’re able to take care of yourself financially, it might also encourage you to be even more charitable in the future, which benefits those in need even more. 

Unfortunately, so many people fail to consider all their options and take advantage of these tax breaks. And let’s face it, as we get older, sometimes it’s hard to find the energy and the wherewithal to explore some of these strategies — which is precisely why it makes sense to leave the hard work to us!  

We’re happy to handle all of it for you so you can get back to enjoying the generous holiday season.