Maximizing Tax Benefits for Charitable Giving

May 20, 2021

With the increase of the Standard Deduction, many clients found that they weren’t itemizing anymore, and discovered they were missing out on the tax benefits of making charitable contributions. Charitable Stacking is a way to fix that.

When it comes to Federal tax deductions, couples automatically receive a Standard Deduction of $24,800 (single filers get half that). If you’re taking the standard deduction, and not itemizing, you aren’t receiving a tax deduction for charitable contributions.

In the past, it may be that you would have had enough deductions to exceed a $24,800 threshold, but the Tax Cuts and Jobs Act of 2017 (TCJA tax reform) made it harder. Don’t get us wrong, the higher Standard Deduction has been great, but it’s taken away the tax incentive of charitable giving, so we’ve been rethinking our approach to giving.

Think of the 24,800 Standard Deduction like a high fence. Only the money that gets over the fence is tax deductible.

Here’s how to get over the $24,800 fence:

State and Local Taxes are limited to $10,000. If you have high state income tax or property taxes, you can get to that $10,000 pretty quickly.

Next, we check for mortgage interest. How much mortgage interest did you pay this year? The mortgage interest on the first $750,000 of indebtedness is deductible.

Next add any medical deductions. Only medical expenses that exceed 7.5% of your Adjusted Gross Income are tax deductible, so unless you had low taxable income or very high medical expenses, you probably won’t get this one, but if you do, add this to the other deductions with the goal of getting over the Standard Deduction.

Finally, look at charitable donations. All of these numbers need to add up to exceed $24,800 before any charitable donations affect your taxes due.

Let's look at an example where someone has no medical deductions, and $10,000 of state tax deductions, and mortgage interest of 6,000 per year: their deductions only add up to $16,000. It will take $8000 to reach the Standard Deduction, so the first $8000 of charitable donations won’t move the needle (for the purposes of saving money on taxes). If someone in this situation gave $8000 every year, they would never see a tax savings for their charitable donations.

Continuing to make your normal annual contributions each year may not make a difference on your taxes if you’re below the Standard Deduction threshold.

Here’s where charitable stacking comes in. In this same situation, if they were able to double up contributions one year, and skip the next, in the year they doubled up they would receive a deduction on $8000 of their charitable contributions. This is the amount that exceeded the Standard Deduction threshold. Obviously, not everyone has the ability to do this, and the motivation for giving is not the tax saving, but if you can get a deduction for the donation it makes it that much nicer.

Donor Advised Funds may be a way to manage the distribution of stacked multi-year contributions.

Take a look at stacking contributions to push past the Standard Deduction threshold in order to realize some tax benefits for your charitable giving. Let us know if you would like to talk through this strategy.