How to Maximize Your Tax Benefits from Charitable Donations
When you make charitable contributions, you can maximize the benefits of your tax bill by strategically planning how and what you’re donating.
Instead of making cash donations to charity, consider minimizing your tax bill by donating your appreciated investments.
You’re a generous person, which is why you donate some of your hard-earned money to charitable causes and organizations each year.
But did you know that being strategic about how and what you donate can benefit your tax bill even more than usual? After all, you should let your charitable donations do good for your tax bill, too.
To learn how to maximize your tax benefits from making charitable donations, consider the following tips below.
To learn more about Betterment’s charitable giving service, find an overview here.
Charitable Donations and Your Tax Bill
The Internal Revenue Service (IRS) allows you to deduct up to 50% of your Adjusted Gross Income (AGI) for the tax year in which your charitable donation is made.
It makes sense then, to be smart and strategic about how and what you’re donating.
Before making a donation, consider the alternatives to simply giving in cash.
Give Securities in Lieu of Cash
Instead of cash, consider donating appreciated securities. By giving investments such as stocks or ETFs, in most cases, you won’t pay capital gains taxes on the appreciation of those securities, and you can deduct the full fair market value of the securities, as long as you’ve kept the holding for more than one year.
It’s worth noting that when you donate your investments, the amount you can deduct on your taxes decreases from 50% of your AGI to 30%, but most individuals don’t exceed either limit anyway.
Suppose you want to donate $10,000 this year, which is 10% of your $100,000 annual income. If you donate cash, you will save $2,800 (assuming a 28% tax bracket).
If you opted to give stocks that have substantial capital gains (let’s say you invested $5,000, and they are now worth $10,000), here’s what your tax savings would be:
- $2,800 of saved federal income tax (assuming a 28% tax bracket)
- $750 of saved capital gains tax (assuming a 15% capital gains tax rate)
In this scenario, by donating appreciated investments and itemizing your deductions, you avoid an extra $750 in capital gains taxes. And, because charities don’t pay taxes on the money received in donations, you won’t be passing any tax bills on to them.
If you use Betterment as an advisor, we keep track of the amount you’re eligible to give, and provide streamlined donations to a growing list of charities. Learn more about Betterment’s charitable giving service here.
Nick Holeman, CFP® and Betterment Financial Planning Expert, says, “It’s generally best to donate appreciated investments instead of cash. This allows you to donate (and deduct) the same amount to charity, but also avoid capital gains taxes. You get a double tax benefit. You could even use the cash you would have donated to repurchase the same investments at a higher cost basis.”
Research Your Charities
During the giving season, donating to charity is certainly rewarding. You may wish to seek out which high-impact nonprofits deserve your generous donations, rather than those with larger marketing budgets.
To maximize your charitable impact, you can consult online sources such as ImpactMatters, GiveWell, and Charity Navigator, all of which provide lists of top-rated not-for-profits. Or use a tool designed to enable individual donors to maximize charitable impact such as Agora for Good, which helps donors create and track portfolios of gifts to various nonprofit high impact organizations in over a dozen sectors.
Angela Rastegar Campbell is the CEO and co-founder of Agora for Good, a groundbreaking new platform that allows donors to build and manage virtual foundations with the support of expert guidance.
Betterment is not affiliated with Agora for Good or its platform. This article is intended to be educational in nature and not to be relied upon as financial or tax advice.
More from Betterment:
How We Use Your Dividends To Keep Your Tax Bill Low
Every penny that comes into your account is used to rebalance dynamically—and in a tax-savvy way.
How to Donate Your Investments to Charity
Learn more about how you can donate shares directly to charity, which can result in tax benefits.
What Charity Navigator’s CEO Thinks about Betterment Charitable Giving
We wanted to learn how Betterment’s charitable giving service could affect the world of nonprofit development at large. So, we went to an expert: Michael Thatcher of Charity Navigator, the nation’s leading platform for helping donors make smart choices for their charitable donations.
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