Lower Your Taxable Income with Year-End Charitable Giving Strategies

As we approach the end of another year, it’s important to finalize any charitable giving plans you may have while there is still time to implement them. Charitable donations usually have to take place by December 31st in order to get credit for them on your current year’s income tax returns. In a recent radio interview, Harrisonburg tax partner Jeff Smith mentioned several types of charitable giving strategies our blog readers may want to consider.

First, if you are subject to required minimum distributions (RMD) from your Individual Retirement Account (IRA), you may want to consider donating all or a portion of your RMD directly to a charity (or multiple charities). The advantage to doing so is that the distribution will not be included in taxable income, but you will still be treated as having made your RMD. This type of donation is referred to as a Qualified Charitable Distribution (QCD), and your IRA custodian will have the forms you need to implement this strategy. QCDs are limited to no more than $100,000 and, because the income is excluded from your income tax returns, you would not receive a charitable deduction for your QCD on your itemized deduction form. This strategy is especially popular with retirees who are both charitably inclined and who would not have enough itemized deductions to exceed their standard deduction.

One popular strategy among investors is to donate appreciated securities that they have held for more than a year. The advantage to this giving strategy is that the donor will generally receive a charitable deduction equal to the fair market value of the securities on the day of the donation and the capital gain will not be taxed. You would want to work with your investment advisor to review your year-to-date realized capital gains and losses to make sure this strategy makes sense for you and, if so, to handle the transfer of the securities to the charity of your choice.

In Virginia, there are several state programs that award state income tax credits for certain types of charitable donations. The Neighborhood Assistance Program run by the Virginia Department of Social Services distributes NAP credits to approved charities that benefit low-income persons, and then those charities can award those credits to donors. The tax credit rate is 65% of the donation and VA requires that the donation be at least $500 (the charity is allowed to have a higher minimum). Credits are awarded on a first-come, first-served basis and charities often run out of these credits. The full list of charities that have been awarded NAP credits may be found here, by clicking on “Approved NAP Organizations”. You should contact the specific charity you are interested in giving to make sure they have NAP credits left to award.

Another Virginia program is the Education Improvement Scholarships Tax Credit Program. Gifts to this program provide scholarships for qualified, low-income students at certain private PK-12 schools in Virginia and the tax credit rate is also 65% of the donation. The minimum donation for an individual is $500 with the maximum being $125,000. You would inquire about this particular tax credit at the private school you are interested in supporting or, in the Harrisonburg office’s geographic area, at The Community Foundation of Harrisonburg-Rockingham.

Taxpayers in West Virginia or Tennessee should contact their nearest BE office for information on state-level tax-giving incentives that may be available in those states.


You can listen to Jeff’s entire radio interview below.