People sometimes view the tax code as a large compilation of complex rules that often make little sense. In some ways that can be true, but it can also be seen as a collection of ways for leaders to incentivize behaviors they want to encourage (like home ownership, charitable giving, and saving for retirement) and disincentivize behaviors they want to discourage (like higher taxes on cigarettes compared to other goods).
For giving to charities in particular, donations can be used to lower your taxable income, thereby lowering your tax owed, as long as you itemize deductions and the organization you’re donating to is a 501(c)(3) public charity or private foundation.
You’re not limited to simply donating cash or goods either. For example, a qualified charitable distribution (QCD) allows you to donate up to $100,000 per year to one or more charities directly from a traditional IRA as part of your required minimum distribution. As QCDs are not required to be included in income but count as part of your required minimum distribution, traditional IRAs are a very attractive source of funds to make charitable gifts. If a required minimum distribution could push you into a higher income tax bracket, you might choose to make a QCD because it won’t increase taxable income. A QCD in one tax year may even assist in reducing your required minimum distributions in years to come. To be eligible to make a QCD, you must be 70 ½ or older at the time the QCD is made.
Another option is to donate appreciated securities, like stocks, bonds or mutual funds. If you do so, you can take a tax deduction for the full market value of the securities and avoid paying capital gains tax. Many rules apply to QCDs and appreciated securities donations, and state tax rules can vary, so consult with your financial advisor to determine if they are a good fit for your tax strategy.
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