Illustration of a person handing a heart to another person

Donating to charity does the heart—and the world—good. But this year, it might not do your wallet as much good as it has in the past. 

Under the Tax Cuts and Jobs Act, most charitable donations are still fully deductible. But because the law eliminates or limits many other deductions, millions of taxpayers who itemized in the past are expected to find that they’ll pay less tax by taking the new, higher standard deduction—$24,000 for married, joint filers and $12,000 for individuals—instead of itemizing.

Still, there are ways to benefit by donating to charity. Older taxpayers who use the standard deduction and must take required minimum distributions from retirement accounts can still get a tax break if they take the proper steps. If you believe that your itemized deductions are about the same as the standard deduction, there are strategies you can use to tip the scales toward a higher itemized deduction.

You may also be able to save on capital gains tax by donating to charity. And if you’re in the rarefied circle of taxpayers whose estates could still be subject to estate tax—heirs don’t pay on the first $11.2 million—you could reduce that taxable portion of your estate through charitable donation strategies. 

Here are three tax-smart ways to donate. In all cases, the recipient must be an IRS-qualified public charity for you to get a tax break.


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Donate Appreciated Stock

Even with the recent stock market downturn, donating appreciated stock can be better for your tax bill than donating cash.

“You get the full deduction of the fair market value of the stock, and you’re not taxed on the gain,” explains Tom Wheelwright, a CPA and chief executive of WealthAbility, a wealth management company based in Phoenix.

To do this, you transfer ownership of your stock directly to the charity. The charity then sells the shares for cash.

More on Charities and Donations

It’s a good deal for the charity, too. Because charities are tax-exempt, they don’t pay taxes on the donation of stock or its eventual sale.

This strategy can result in tax savings. Say you’re in the 24 percent tax bracket and donate $5,000 in stock that has appreciated by $2,000 since you bought it more than a year ago. If you sell the stock before donating it, you’ll pay 15 percent, or $300, in long-term capital gains tax on that $2,000 in appreciation. If you donate what’s left over—$4,700—you’ll get a 24 percent tax break of $1128.

But if you give the appreciated stock directly to a charity, you’ll get a $1,200, or 24 percent, tax deduction for the $5,000 donation and avoid the capital gains tax.

Donate Directly From Your IRA

If you’re 70 ½ or older and haven’t completely withdrawn the annual minimum distribution you’re required to take from your IRA, you could donate the rest of it (or all of it) directly to a charity. This is known as a qualified charitable distribution.

If the donation is $100,000 or less, it won’t be counted as taxable income, as a distribution normally would be. And it still counts toward your annual required minimum distribution (RMD), as long as you have taken it already. Donations of more than $100,000 from retirement accounts will be taxed as ordinary income, as with other RMDs.

Couples donating more than $100,000 a year are in luck, says Michael Kitces, a certified financial planner based in Columbia, Md. He says that each spouse can give up to $100,000, as long as those funds come out of his or her own IRA.

IRA distributions are taxed as regular income, so the more you can reduce your total income through donations, the less tax you’ll pay. To ensure you avoid taxes on your gift, make sure the distribution goes directly to the charity. 

Give Through a Donor-Advised Fund

A donor-advised fund, or DAF, is an investment account into which you transfer securities or other assets—cash, real estate, private business interests, private company stock—that you intend to donate. Once you make the transfer, it is considered a donation and the money is no longer legally yours. 

You can fully deduct the fair market value of the amount you put into a DAF for the year of the donation, but you don’t have to make the entire donation that year. Instead, you can dole out those assets to the charities of your choice over several years.

There are potential tax benefits to giving this way:

• You don’t pay capital gains tax. Because you don’t sell the assets before you donate, you pay no capital gains tax on any appreciation prior to the donation.

• Your heirs could pay lower estate taxes. This is because the money in a DAF is no longer legally yours.

• Your income tax will be lower. If your total itemizable deductions are close to the new, higher standard deduction, you could save on your income taxes by donating through a DAF.

The key is to “bunch” your contributions, says Ronald Leder, managing partner at ezTaxReturn.com, an online tax-prep service. “Bunching means taxpayers contribute every other year instead of annually,” Leder says.

If you do that, you could double your charitable contributions in 2018, possibly raising your itemized deductions above the standard deduction—$24,000 for married, joint filers and $12,000 for individuals. Then you could itemize for 2018 and save on your income taxes, he explains. In 2019, you’d donate less—or nothing—and use the standard deduction for that year.

The charities you give to don’t have to know the difference. “You can allocate the money annually from the DAF over several years,” Leder says.

While you no longer own the assets you’ve donated, you still have control over how they’re invested and where your donations will go. While the assets remain in the DAF, they have the potential to grow, tax-free.

Another benefit: The donations you make through a DAF remain private, says Lawrence Pon, a CPA and personal financial specialist in Redwood City, Calif.