Donating to charity does not qualify for a tax deduction. This shouldn’t stop you from giving to charity, but it may be a reason to reconsider your approach.
Taxpayers who itemize deductions are usually able to write off charitable contributions. The Tax Cuts and Jobs Act 2017 nearly doubled the standard deduction. However, the vast majority of taxpayers opt for the standard deduction. (Temporary provisions in pandemic relief legislation permitted taxpayers to deduct $300 from their donations in 2020 or 2021 without itemizing. However, those provisions have since expired. )
Donating to charity solely for the purpose of receiving a tax deduction is absurd. For every dollar that you give away, you will save 22 cents on taxes if you fall within the 22% federal tax bracket. You can still get a tax break if you are charitable-minded if you do some planning. Or you might reconsider how you give away money.
Donor-advised money isn’t only for the wealthy
Experts in tax recommend “bunching” deductions if itemized deductions are within the standard deduction limits. In 2023, this will be $13,850 per individual and $27,700 per married couple filing jointly. Bunching allows taxpayers the ability to take the standard deduction in one year and move as many of their itemized expenses into another year. For example, if you want to maximize deductions in this year, you could pay your January 2023 mortgage loan payment in December and make two years worth of charitable contributions.
A donor-advised account is a way to reduce deductions. This account allows you to make a lump sum and then distribute the money to charities of your choosing in subsequent years. Financial adviser Mark Astrinos, who is a certified public accountant in San Francisco Bay Area, and a personal financial specialist, recommends using a donor advised fund. Major investment companies, universities, community foundations, and other charities offer donor-advised fund options.
Astrinos may encourage clients to give $15,000 to a donor-advised charity for three years, if they normally give $5,000 per year to charity. The client could deduct additional expenses such as property taxes and mortgage interest beyond the standard deduction.
A double tax advantage may be available by donating stock
If a stock has risen in value since its purchase, it could result in a large tax bill when it is sold. If you donate the stock to a qualified charity, or your donor-advised funds, this bill can be avoided. If you are able to itemize deductions you can also take a deduction for current stock price on the date of your donation.
Astrinos uses an example of someone who had invested $10,000 in shares now worth $100,000. The stock could be sold to make a capital gain of $90,000. However, it could be donated to create a $100,000 deduction that would avoid capital gains tax.
Astrinos states that it is a double tax advantage.
After age 70, consider donating from your IRA.
Qualified charitable donations allow anyone 70 1/2 years old or older to make a donation directly from their individual retirement accounts (or IRAs) to charity. The money is not subject to tax, but it is not deducted from their income.
Astrinos states that qualified charitable distributions are often appealing to those who have to withdraw minimum amounts from their retirement accounts, but don’t require the income. (The IRS requires that people withdraw minimum amounts from most retirement funds — and pay tax on that income — beginning at 72 years old. )
Consider gift exemption limits for direct gifts
Other restrictions are placed by the IRS on charitable deductions. For example, the recipient must be a “recognized Charity” — an organization exempt from tax that is on the IRS’ list. Gifts to individuals or political organizations are not eligible.
You might be able to give a tax deduction if you don’t get one for your generosity. Contributions could be made to political causes, pay rent for someone who is in need, or help reduce the student loan debt of a friend. You should be aware of the annual gift exemption limits if you give money to someone. You can gift up to $17,000 to any number of people without filing a gift tax return in 2023. You won’t be subject to gift tax if the annual amount you give away exceeds the lifetime exemption in 2023, which is $12.92million. You don’t have to give $17,000 to spouses, political organizations, or to pay tuition or medical bills to someone else.
You could also continue to give to your favorite charities. They may be in dire need of your support more than ever. Charities fear that high inflation and a weak stock market may limit giving.
Astrinos points out that people are more generous in times of good fortune, but they need it most when things are bad.
This article was written and published originally by The Associated Press by NerdWallet.