How to maximize your tax deduction for charitable donations

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Members of the Salvation Army play music during the lighting of the world’s largest Red Kettle in the Times Square neighborhood of New York, U.S., on Tuesday, Dec. 1, 2020.

Jeenah Moon | Bloomberg | Getty Images

This holiday season, it may be possible to lower your taxes while supporting your favorite charity, experts say.  

Despite the shaky economy, most Americans plan to donate similar amounts this year as they did last year, a recent Edward Jones study found.

While tax breaks typically aren’t the main reason for giving, experts say some donors may be missing out on the chance for a deduction. 

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“Many people give money and don’t get any tax benefits because they don’t donate enough to itemize,” said certified financial planner Jeremy Finger, founder and CEO at Riverbend Wealth Management in Myrtle Beach, South Carolina.

Here’s what to know about the charitable deduction before opening your wallet, and two of the “best” ways to give, according to financial advisors.

Why it’s harder to claim the charitable deduction

Profitable assets are the ‘best’ to give

If you expect to itemize deductions, your charitable write-off depends on the type of asset you donate.

Juan Ros, a CFP at Forum Financial Management in Thousand Oaks, California, said profitable investments in a taxable brokerage account are “generally the best type of asset to give.”

Here’s why: By donating an appreciated asset, you’ll receive a charitable deduction equal to the fair market value while avoiding capital gains taxes you’d otherwise owe from selling, he said. 

Consider a charitable transfer from your individual retirement account

If you’re 70½ or older, donating directly from a traditional individual retirement account is “usually the best way to give,” said Mitchell Kraus, a CFP and owner of Capital Intelligence Associates in Santa Monica, California. 

The strategy, known as a “qualified charitable distribution,” or QCD, involves a direct transfer from an IRA to an eligible charity. You can give up to $100,000 per year and it may count as your required minimum distribution if you transfer the money at age 72.  

Since the donation doesn’t show up as income, you’ll still be getting a tax break, even if you don’t itemize deductions, Kraus said. Reducing your adjusted gross income may help avoid triggering other tax issues, such as higher Medicare Part B and Part D premiums.



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