Here's What Happens When You Combine Charitable Giving With Smart Tax Planning

Making donations to charities is a generous thing to do, and it can also help reduce your tax bill. But if you want to make the most of your charitable giving, smart tax planning should also be part of your agenda.

As tax season approaches, many Americans are thinking about how to maximize their charitable giving, in hopes of getting a tax break. Keep in mind that you can only claim tax deductions for charitable contributions if you itemize your deductions. People who take the standard deduction (which is most people -- about 90% of tax returns use it, according to the IRS) are not allowed a tax break for their charitable giving.

If you can itemize deductions and you're able to donate a significant amount to charity, there are several ways that charitable giving can enhance your tax planning. Let's look at a few positive results that can happen from tax deductible charitable giving.

1. Save money on this year's taxes

One simple benefit of tax deductible charitable giving is that it can reduce your tax bill for the current tax year. For example, a married couple filing jointly with a taxable income of $150,000 in 2023 is in the 22% marginal tax bracket. For every $100 that this couple gives to charity, they lower their taxes by $22.

If you have some extra cash sitting in a low-yield bank account at the end of the year, you should consider making additional donations to charity. That extra tax refund could be worth more than the APY on even the best high-yield savings accounts.

If you want to qualify for a tax deduction in the current tax year, you must make your charitable contributions before the close of the tax year. Unlike IRAs or health savings accounts (HSAs), you are not allowed to make charitable contributions that count toward the prior tax year. So be sure to plan ahead and think about how much money you want to give before the year is done.

2. Use charitable donation "bunching" to reduce your tax bill two years in a row

If you have some extra cash to give to charity, and you are pretty close to being able to itemize deductions, you might want to consider a tax planning strategy called "bunching" charitable donations. With this strategy, you give extra money to charity in the current tax year, with the goal of itemizing deductions this year, and taking the standard deduction next year.

"Accelerating your charitable contribution tax deduction could help lessen the burden for those facing significant taxes as 2023 ends," said Richard Lavina, co-founder and CEO of Taxfyle. "If you plan to donate to charity, consider accelerating multiple years' worth of donations into 2023. This could push you over the standard deduction limit and allow you to itemize deductions."

If you are close to having more itemizable deductions, giving a little extra to charity during the current tax year might help you get over the top -- and reduce your tax bill two years in a row.

Here's how it might look. Let's say that there's a married couple (filing jointly) who has given $6,000 to charity in 2023 and plans to do the same in 2024. Here's what their itemizable deductions would look like:

In this case, they should take the standard deduction in 2023 ($27,500) and 2024 ($29,200), for a total of $56,700 of deductions in two years. But what if they could give just a little bit more money in 2023? Instead of waiting for 2024 to donate that extra $6,000, they can accelerate those donations into 2023. Now, they will have $32,000 of deductions in 2023, and they can itemize in 2023.

Even if they still end up taking the standard deduction in 2024, their combined deductions for two years will be $61,200. With this tax planning strategy, the couple can deduct an extra $4,500 from their taxable income across both tax years, compared to just taking the standard deduction both years.

3. Get a double tax break by donating certain stocks or other assets

Another easy tax planning strategy for charitable giving is to donate stocks or other financial assets that have appreciated in value. If you own stocks, bonds, or mutual funds that have gone up in value, you can donate those assets to charity to get a double tax break. Not only can you claim a tax deduction for the fair market value of the assets at the time of your donation, but you also avoid paying capital gains tax -- by giving away the assets, you do not have to realize a gain by selling them. And the charity can then sell the assets tax free. This tax planning maneuver can help you reduce your income tax and capital gains tax bill, while supporting your favorite charities.

Bottom line: For people who have higher incomes, who can itemize deductions, and who have significant assets that they want to give to charity, charitable giving should be part of the mix for your tax planning. Be sure to talk with a professional tax advisor to get ideas for your specific tax situation and financial goals.