(Updated to fix a typo)

The holiday season is a perfect opportunity for generosity, but experts remind us it’s also fine to gain some benefits yourself.

In the last couple of years, charitable giving has faced challenges due to inflation and rising interest rates straining individual budgets. In 2022, as inflation peaked at a nearly four-decade high, total charitable contributions dropped by 10.5% to $499.3 billion, after adjusting for inflation, according to the nonprofit organization Giving USA, which studies philanthropy.

The decline in 2023 was less severe, with inflation-adjusted donations decreasing by just 2.1% to $557.16 billion. With inflation rates easing and interest rates falling, experts are hopeful that Americans will either continue to reduce the downturn or even reverse it this year.

Recognizing that many people might still be feeling financial pressure, financial specialists have shared strategies to help Americans make the most of their donations for both the charities they support and their own financial situations.

“A lot of individuals donate cash,” noted Dr. Una Osili, associate dean for Research and International Programs at the Indiana University Lilly Family School of Philanthropy. However, she added that there’s been a growing awareness of more effective giving methods.

Think Beyond Cash Donations

While it might be commonplace to toss some change into charity buckets during the holiday season, this might not be the most efficient way to give, according to experts.

“If you contribute cash to a Salvation Army donation bucket, it doesn’t leave much room for tax benefits,” explained Mark Steber, chief tax officer at Jackson Hewitt.

A more beneficial approach is to make donations that provide a receipt, as this can enhance your tax situation.

• For those who itemize their income tax returns, charitable deductions can be claimed if you have appropriate documentation. This can include bank statements or written confirmations from the charitable organization, detailing its name along with the donation amount and date, according to the IRS.

• Instead of giving cash, experts suggest directly donating long-term appreciated assets, such as stocks, mutual funds, bonds, real estate, or private company stock. This strategy helps avoid capital gains taxes from selling these investments while allowing you to deduct the full market value of the donated asset, as stated by Brandon O’Neill, a charitable planning consultant at Fidelity Charitable.

“The stock market has seen substantial returns, making this a wise way to give without liquidating your investments and facing tax implications, which would reduce the amount you can donate,” Amy Theisen, a senior strategist for estate and legacy planning at Edward Jones, advised.

It’s important to note that there are limits to the deductions for donations of appreciated securities, capping at 30% of your adjusted gross income (AGI).

Additionally, since you’re not writing a check, you may have available cash to invest in more stocks,” O’Neill pointed out.

Strategies for Smart Giving

Experts emphasize that the method of giving can be just as essential as the act itself.

Here are some strategies advised by specialists to support your chosen cause while also saving money:

Donor Advised Fund (DAF): This is a charitable investment account where donors can contribute and receive an immediate tax deduction. They can later recommend grants from the fund over a period. If funds aren’t granted right away, they may be invested to grow tax-free, allowing for potentially larger donations in the future.

Theisen points out, “You aren’t obligated to add funds yearly or follow a strict schedule, which offers considerable flexibility.”

Previously deemed exclusive for the wealthy, DAFs have become accessible for many, experts say. They can be set up easily and affordably when compared to establishing a foundation, which requires legal documentation and financial planning, according to O’Neill.

“A DAF can be created in as little as five minutes online. We can quickly transfer assets and provide a tax receipt,” he added.

While some organizations may require a minimum deposit for establishing a DAF, others, like Fidelity Charitable, do not.

“Wealth isn’t a prerequisite for a DAF,” O’Neill emphasized, noting that the median balance for accounts at Fidelity Charitable is $21,000.

Bunching Donations: Due to the doubling of the standard deduction from the 2017 Tax Cuts and Jobs Act, only about 10% of taxpayers itemize and can benefit from charitable tax deductions. For 2024, the standard deduction is set at $14,600 for individual filers and married individuals filing separately, $21,900 for heads of households, and $29,200 for couples filing jointly as well as surviving spouses.

If you’re nearing the limit of the standard deduction, you can combine, or “bunch,” your planned gifts into one year to itemize, and take the standard deduction in another year for tax savings, according to financial advisers.

Bunching can also help manage a high-income year, perhaps due to a business sale or year-end bonus, or during Roth IRA conversions, as explained by O’Neill.

Converting a traditional IRA to a Roth IRA often leads to substantial taxes, but making charitable contributions upfront can mitigate that tax impact.

Qualified Charitable Distribution (QCD): Individuals who are aged 70½ or older can make annual QCDs of up to $105,000, tax-free, to qualified charities directly from a taxable IRA. Such distributions are not counted in taxable income, preventing a possible increase into a higher tax bracket.

If you are at least 73 years old, your Qualified Charitable Distributions (QCDs) will fulfill your Required Minimum Distribution (RMD) for the year.

Important Reminders

• Typically, only those who itemize can claim tax deductions for charitable contributions.
• If you lack items to donate, consider volunteering. “While you can’t claim a tax deduction for your time,” notes Steber, “you may deduct certain unreimbursed expenses incurred while volunteering, like travel costs, parking, and tolls.”
• Your contribution can be increased if your employer offers a matching donation program, but you cannot claim a deduction for the amount your employer contributes.
• Not all companies provide matching gifts for Donor-Advised Funds (DAFs), so it’s essential to verify your employer’s policy, as mentioned by Theisen.
• Even if you don’t itemize deductions on your federal tax return, your charitable contributions might still be deductible on your state return. Many states do not follow the same itemized deduction limits as the IRS, according to Richard Pon, a CPA in San Francisco.
• Purchases of raffle tickets are not classified as donations, and buying items at charity auctions is generally not tax-deductible, according to Pon. Similarly, donations via platforms like GoFundMe usually don’t qualify as deductible contributions.
• Be aware of your contribution limits. Generally, deductions for long-term appreciated assets held for over a year are capped at 30% of your Adjusted Gross Income (AGI). In contrast, deductions for other contributions, like cash donations, typically have a limit of 60% of AGI, according to Fidelity Charitable.