Tax season can be a stressful time for many people, especially if you think you may have missed out on some big tax deductions this past year.
The good news is that giving to charity regularly is one of the best strategies for minimizing your taxes. Combined with other common deductions like mortgage interest and real estate taxes, your charitable donations can help you exceed the standard deduction and itemize your taxes for additional savings.
Ready to make sure you don’t accidentally overpay on your taxes? Here are 4 ways to avoid common and expensive tax regrets around charitable donations.
1. Don’t donate cash if you have stock or crypto with gains.
When you donate appreciated assets, such as stock or crypto, you’ll avoid paying capital gains taxes and can immediately claim the full fair market value as a charitable deduction. Let’s break down these steps in a little more detail.
When you trade or sell an appreciated asset (which now includes crypto in addition to regular stocks and ETFs), you have to pay capital gains tax. If you’ve held the asset for less than a year, then you’re subject to short-term capital gains tax, which is your regular income tax rate. For assets held a year or longer, you’ll pay long-term capital gains tax, which is either 15% or 20% for most people, depending on your income level.
But you can rake in two incredible benefits if you skip selling and instead donate the stock or crypto directly to a charity. The first advantage is that you don’t have to pay capital gains tax on that stock. The second is that you actually get to use the entire fair market value of the stock or crypto as a tax deduction when you itemize.
It’s an incredible win-win if you’ve had stocks that have significantly appreciated in an account that’s not tax-advantaged.
2. Don’t lose track of those donation receipts.
Another mistake to avoid is poor record-keeping. You can deduct up to 30% to 60% of your adjusted gross income (AGI) through charitable donations. So by staying organized and maintaining accurate records, you can ensure that you're taking full advantage of one of the most generous income tax deduction strategies.
Any charity you financially support should send you a receipt of some sort confirming your contribution. The IRS recommends keeping any tax documentation for at least three years after your filing date.
Instead of collecting and storing paper copies on your own for that period of time, make your donations through Daffy to get an annual tax summary report of your eligible charitable tax deductions. It’s an easy way to track and store your donation history so you don’t miss out on tax savings or get stuck scrambling for lost documents in case you’re audited.
3. If you are having trouble exceeding the standard deduction, consider bundling multiple years’ worth of donations together.
It can be frustrating to donate to your favorite charities throughout the year only to realize you haven’t exceeded the standard deduction in order to actually claim them as deductions.
One way to get around this is to bunch your charitable donations. With this tax strategy, you group several years’ worth of donations into one year in order to exceed the standard deduction threshold.
Using a donor-advised fund like Daffy makes bunching easy because you can contribute two or more years’ worth of donations into your account during one tax year and immediately receive the tax deduction for that amount.
Then you’re ready to distribute funds to the charities of your choice whenever you’re inspired to give. You can space out your contributions over a two-year period, for instance, then go back to taking the standard deduction in the other years.
4. Don't wait until December to make donations.
Charitable giving should be a part of your year-long financial plan rather than an afterthought at the end of the year. Set the amount you want to donate for the year, and make sure to give regularly to the organizations you support.
Not only does giving throughout the year help you be more intentional with your giving, but it’s also the best tax strategy. You can be intentional with the amount you give rather than relying on your financial ability at the end of the year. This allows you to meet both your charitable giving goals as well as your tax strategy.
Daffy makes it simple to save money on taxes. By signing up for Daffy, you can easily donate stock or crypto, keep your tax receipts organized in one place, and plan all of your charitable donations.
Please note that the information contained on this page is for educational purposes only and should not be considered tax or investment advice. Any calculations are intended to be illustrative and do not reflect all of the potential complexities of individual tax returns. To assess your specific situation, please consult with a tax and/or investment professional.