Stop giving cash

Americans are some of the most giving people in the world. In fact, we are the most giving, according to World Giving Index. Americans donate more time and money to charity than citizens of any other country.

But as a financial planner, it’s obvious to me we can do better – not necessarily in terms of the amount we give, but in how we give.

What do I mean? How can we improve? I can summarize it in three words: Stop giving cash.

We are approaching year-end, which has traditionally been a prominent time of year to give. If you are considering a gift to charity, it can pay to give in a tax-aware way.

The most common gifts to charity are cash, check or credit card. It’s plain to see why. It’s quick and easy. But that’s often the worst way to give. And the reason comes down to taxes.

When you file your tax return, you can either take the standard deduction, or you can itemize your deductions. About 85 to 90 percent of U.S. taxpayers utilize the standard deduction.

If you use the standard deduction, donating with cash, check or credit card is likely a very tax inefficient way to give to charity. But even if you itemize your deductions, there could still be better ways to give.

Here are three ways to do good and lower your income taxes at the same time.

First, consider donating investments that have increased in value. If you bought a stock for $90 and it has increased to $120, you gained $30. If you sell the investment, however, you will owe tax on your gain. Depending on how long you held the investment and your other sources of income, the tax bite could be over 20 percent. But if you donate the stock to a charity, you can count the full $120 as a charitable contribution and you avoid paying tax on the gain. The charity can sell the investment and keep the full $120.

This strategy only works for investments subject to capital gains. You couldn’t do it for investments in an IRA or 401(k), for example.

The second tax-aware way to give is commonly called “bunching.” Remember, you only get a tax deduction from charitable gifts if your itemized deductions exceed the standard deduction. So one strategy to ensure that happens is to bunch your charitable deductions into a single tax year. For example, rather than giving $5,000 to charities each year, you could give $10,000 in one year and nothing in the second year. The total gifts to charities remain the same, but you have a much better chance of hitting the itemized deduction threshold if you bunch your donations into one year, which results in paying less taxes.

This clearly involves some tax planning. You would want to ensure your bunched donations, combined with your other itemized deductions, exceed the standard deduction. Otherwise, the bunching strategy is ineffective.

That brings us to the third, and final, way to do good while keeping the tax code in mind. Unfortunately, it only works for individuals aged 70-1/2 or older with an IRA. It’s called qualified charitable distributions, or QCDs for short. This strategy works especially well once an IRA holder turns 72 and becomes subject to required minimum distributions. Here’s how it works: Rather than taking a distribution personally from an IRA and then donating the money to charity, you can achieve a better result by giving the distribution straight to charity.

Here’s why: Giving the distribution directly to charity excludes the distributed amount from your income, meaning you won’t owe income taxes on it. If you take the distribution personally and then give the money to charity, the full distribution amount will be subject to ordinary income taxes. That can mean a big difference in taxes, especially for large donations.

Keep in mind, you can donate up to $100,000 via QCDs each year.

So there you have it, three tax-smart ways to give to charity.

Don’t get me wrong, the pure act of giving is the most important and most fulfilling – no matter the form. But if you can give and get a tax benefit, all the better. Just remember, that usually means leaving your wallet in your purse or pocket.

Justin Lueger is President of Invisor Financial LLC, a registered investor adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at

This column is paid for by Invisor.



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