The vast majority of Americans no longer get tax breaks for charitable contributions, but that’s no reason to stop giving. In fact, you might take this opportunity to broaden your ideas about what constitutes a charitable gift. To make your contributions count while maximizing your tax benefit, consider ways to adjust your approach. Review donor-advised funds, stock donations, and qualified charitable distributions from your Individual Retirement Account, or IRA. If you are skipping a charitable gift instead of a gift to an individual, make sure you know the limits of the gift exemption.
Most people no longer get a tax deduction when donating to charity. This shouldn’t stop you from donating, but you may want to change your approach.
Generally, only taxpayers who itemize deductions can write off charitable contributions. The vast majority of taxpayers take the standard deduction instead, which was nearly doubled by the Tax Cuts and Jobs Act 2017. have expired.)
It never made sense to donate just to get a deduction. If you’re in the 22% federal tax bracket, for example, you save only 22 cents in taxes for every dollar you donate. If you’re charitable, however, there may still be ways to get tax relief for your generosity with a little planning, or you can reconsider how you give money.
DONOR-ADVISED FUNDS ARE NOT JUST FOR THE RICH
Tax experts recommend “bundling” deductions when people’s itemized deductions are close to standard deduction limits, which in 2023 will be $13,850 for single filers and $27,700 for married couples filing jointly. Bundling allows taxpayers to take advantage of the standard deduction in one year while shifting as many of the itemized expenses as possible into another year. If you maximize deductions for this year, for example, you could pay your January 2023 mortgage payment in December or make two years of charitable donations.
One way to pool deductions is to use a donor-advised fund, an account that allows you to donate a lump sum in one year and then distribute the money in future years to the charities of your choice, explains financial advisor Mark Astrinos, a certified public accountant and personal finance specialist in the San Francisco Bay Area. Donor-advised funds are offered by large investment firms as well as universities, community foundations, and various charities.
If the customer normally gives about $5,000 a year to charity, Astrinos can encourage them to contribute three years of donations, or $15,000, to a donor-advised fund. The gift would allow the client to exceed the standard deduction for a single filer and potentially make other expenses, such as mortgage interest and property taxes, deductible.
THE DONATION OF SHARES CAN OFFER “A DOUBLE TAX BENEFIT”
A stock that has skyrocketed in value since you bought it can create a big tax bill when you sell it. You can avoid this bill if you donate the stock to a qualified charity or your donor-advised fund. If you are able to itemize deductions, you can also take a deduction for the current stock price on the day of your donation.
Astrinos uses the example of someone who invested $10,000 in stocks that are now worth $100,000. Selling the shares would create a capital gain of $90,000, while donating them would create a deduction of $100,000 and avoid capital gains tax.
“It’s a double tax benefit,” says Astrinos.
CONSIDER GIVING FROM YOUR IRA AFTER 70
Qualified charitable distributions allow people age 70.5 and over to donate money directly from their Individual Retirement Accounts, or IRAs, to charity. There is no tax deduction, but the money is also not included in their income.
Qualified charitable distributions often appeal to people who face the required minimum distributions from their retirement accounts but don’t need the income, Astrinos says. (The IRS requires people to withdraw minimum amounts from most retirement accounts — and pay taxes on that income — starting at age 72.)
CONSIDER GIFT EXEMPTION LIMITS FOR DIRECT DONATIONS
The IRS places other restrictions on charitable deductions, such as requiring the recipient to be a “recognized charity” – a tax-exempt organization that is on the IRS list. Gifts to individuals and political organizations are not eligible.
If you don’t get a tax deduction for your generosity, you can expand the list of good causes you want to benefit from. You could contribute to a political cause, help reduce a friend’s student debt, or pay someone’s rent if they’re in trouble. However, if you are giving money to an individual, you should understand the annual gift exemption limits. In 2023, you can give up to $17,000 to as many people as you want without having to file a donation return. You owed no gift tax as long as the amount you gave beyond this annual limit exceeded the lifetime exemption, which in 2023 is $12.92 million. The $17,000 limit does not apply to gifts to spouses or political organizations or if you are paying for someone else’s medical bills or college tuition.
Or you can just keep giving to your favorite charities, which may need your contribution more than ever. Charities fear a tough stock market and high inflation will limit donations from remaining donors.
“People are more generous when times are good, but they need it most when times aren’t good,” Astrinos notes.
Liz Weston is a NerdWallet columnist, certified financial planner, and author of “Your Credit Score.” Email: lweston@nerdwallet.com. Twitter: @lizweston.
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