In Focus – SCCCU Blog

As the year winds down, many of us will look to maximize our charitable contributions to support the causes closest to our hearts and reap some benefits come tax season. Donating to a qualified 501(c)(3) non-profit organization may earn a tax deduction. But how exactly does the process work?

The Tax Cuts and Jobs Act Shake-Up
In 2017, the Tax Cuts and Jobs Act (TCJA) brought about a seismic shift in tax deductions, particularly by significantly increasing the “standard deduction”—the amount each taxpayer can subtract from their taxable income to lower their IRS bill. Before this law, many people opted to “itemize” their deductions. Itemizing deductions meant that people tallied up all qualifying deductions, such as charitable donations, medical expenses, mortgage interest, state and local taxes, and more, and if the total exceeded the standard deduction, they’d itemize. But post-TCJA? Not so much.

The standard deduction for the 2024 tax year is $14,600 for single filers and $29,200 for couples. This means you’d need to rack up more than those amounts in itemized deductions to make it worth itemizing. While some of us might reach that threshold with medical expenses or mortgage interest, most won’t even come close — approximately 90% of taxpayers no longer itemize.

The Impact on Charitable Giving
The fact that smaller charitable contributions no longer “count” as tax-deductible write-offs has been a gut punch to charities. Americans donated $319.04 billion in 2023, which marks a 6.4% decline compared to 2021. When adjusted for inflation, the drop is a staggering 13.4%, according to data from online fundraising platform DonorBox.

But if you want to give  (and still see those rewards on your taxes), there’s a clever workaround. It’s called batching, which means strategically timing your donations to maximize your deductions. Let’s dive in.

What Qualifies as a Donation?
According to the IRS, a donation or gift is tax-deductible if made to a recognized 501(c)(3) charitable organization. While not all 501(c)(3) non-profits are charities, any organization operating as a charity must have a 501(c)(3) for you to get a tax write-off for the donations you make.

Also, any donation you make must be made during the tax year to be deductible from your taxes for that year. In other words, you can't donate in 2024 and write off that donation in 2025. And if you donate property (such as real estate, furniture, or a used car), the IRS says you can only deduct what’s known as the “fair market value.” In other words, if you donate a car to charity, you can’t say it’s worth $20,000 when you could probably only get $2,000 if you sold it.

For those of us who have several donations we’d like to make — or a few deductions to take for things like medical expenses or mortgage interest — it may make financial sense to lump them into a single calendar year. That’s where batching comes in.

The Strategy: Combining Your Charitable Gifts
“For those who are philanthropically inclined, batching donations is a strategy that involves lumping together charitable donations into a single tax year rather than spreading them out over multiple tax years,” explains certified financial planner Will Brennan of Park Hill Financial Planning and Investment Management.

Essentially, with this strategy, you’d look to make significant charitable gifts in alternate years — or even every 3-5 years — to donate enough so that you climb over the standard deduction threshold, which allows you to itemize your deductions for a more significant tax break. This strategy used to be called “lumping” or “clumping” and is now often referred to as “batching” or “bundling.”

“If you tend to make bigger contributions to nonprofits that are tax-deductible, but you don’t have a ton of other deductible items like mortgage interest, you might be losing out on reducing your taxable income—unless you batch donations,” says certified financial planner Rachel Lawrence, founder and CEO of Reverie Wealth.

When you don’t batch, you can simply take the standard deduction and set aside your gift money for your next batch in an upcoming year. If you need a more significant bump to surpass the standard deduction threshold, consider combining charitable contributions with other deductible expenses, such as state and local taxes, mortgage interest, or substantial medical bills. In a year when a large medical bill hits, it might make perfect sense to bundle your charitable contributions to maximize your tax savings.

Give Your Appreciation
The stock market has had quite a run lately. If you’re sitting on gains, it’s important to remember that by giving away appreciated stock (or stock that has grown in value) rather than giving cash, you can essentially give away more for less. When you give appreciated securities directly to charity, you pay no capital gains taxes on the amount those securities have grown. Neither does the charity. It can sell the investments and keep the total value of your gift, which can be a winning move for everyone.

The IRA Wrinkle
There’s one last strategy for anyone 59 ½ years or older: you can give up to $100,000 out of an IRA each year directly to charity. This is of particular help for anyone looking to lower the RMDs (or required minimum distributions) that kick in at age 73 in an event to minimize income taxes. The gift counts toward those RMDs, but it doesn’t count as income, so as long as you don’t need the money to live on (or if you were going to give out of savings), funneling the money through this channel can be a smart strategy.

The Bottom Line
Before diving into charitable donations, have a chat with your tax preparer. They may have additional insights to help you optimize your giving and set you up for success in your batching years.

And don’t forget to keep meticulous records of all donations and receipts. The IRS requires proof of donations to qualified 501(c)(3) charities, just as they do for qualified medical expenses.

Finally, a heads-up: This whole landscape may change soon. Many Tax Cuts and Jobs Act provisions, including the standard deduction, are set to expire on December 31, 2025. If Congress doesn’t act before then, the standard deduction could shrink by about half in 2026, making itemizing more attractive to a broader range of taxpayers.