Most people no longer get a tax deduction when they donate to charity. That shouldn’t stop you from donating, but you might want to change your approach.
Typically, only taxpayers who itemize deductions can write off charitable donations. The vast majority of taxpayers instead take the standard deduction, which was nearly doubled by the Tax Cuts and Jobs Act of 2017. (Temporary provisions in the pandemic relief legislation allowed taxpayers to deduct $300 of their donations in 2020 and 2021 without listing those provisions as having expired.)
It’s never made sense to donate just to get a deduction. For example, if you’re in the 22% federal tax bracket, you save just 22 cents in taxes for every dollar you give away. If you’re charitable, however, there may still be ways you can get a tax break for your generosity with a little planning, or you could reconsider how you give money away.
DONOR FUNDS ARE NOT JUST FOR THE RICH
Tax experts recommend “bundling” deductions when individuals’ individual deductions are close to standard withholding limits, which will be $13,850 for single parents and $27,700 for joint-filing couples in 2023. Bundling allows taxpayers to take the standard deduction in one year while shifting as many individual expenses as possible to another year. For example, if you maximize deductions for this year, you could pay your January 2023 mortgage payment in December or make charitable donations for two years.
One way to pool deductions is to use a donor-recommended fund, an account that allows you to contribute a lump sum in one year and then distribute the money to the charities of your choice over the coming years, says financial advisor Mark Astrinos, a board-certified public accountant and personal finance specialist in the San Francisco Bay Area. Donor Advisored Funds are offered by major venture capital companies as well as universities, community foundations and various charities.
If the client typically gives around $5,000 per year to charity, Astrinos may encourage that person to give three years’ worth of donations or $15,000 to a donor-recommended fund. The donation would allow the client to exceed the standard deduction for a single applicant and potentially make other expenses such as mortgage interest and property taxes deductible again.
DONATION OF STOCK CAN OFFER A DOUBLE TAX BENEFITS
A stock that has increased in value since you bought it can incur a large tax bill when you sell it. You can avoid this bill by giving the shares to a qualified charity or to your donor-recommended fund. If you are able to itemize deductions, you can also make a deduction for the stock’s current 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 result in a $90,000 capital gain, while a donation would result in a $100,000 deduction and avoid capital gains tax.
“It’s a double tax benefit,” says Astrinos.
CONSIDER GIVING IRA AFTER THE AGE OF 70
Qualified charitable distributions allow people age 70½ and older to donate money to charity directly from their individual retirement accounts or IRAs. There is no tax deduction, but the money is not included in their income either.
Qualified charitable distributions often appeal to people who are facing the required minimum distributions from their retirement accounts but don’t need the income, Astrinos says. (The IRS requires people age 72 and older to withdraw minimum amounts from most retirement accounts — and pay taxes on that income.)
NOTE GIFTS EXEMPTION LIMITS FOR DIRECT GIFTS
The IRS imposes other restrictions on charitable deductions, such as: B. Requiring that the recipient be a “recognized charity”—a tax-exempt organization on the IRS’s list. Gifts to individuals and political organizations are not acceptable.
If you don’t get a tax deduction for your generosity, you can expand the list of charities you want to benefit. You could contribute to a political cause, help reduce a friend’s student loan debt, or pay someone’s rent when they’re struggling. However, if you are giving money to someone, you should familiarize yourself with the annual gift allowances. In 2023, you can gift up to $17,000 to anyone you want without filing a gift tax return. You would not owe gift tax until the amount you gifted beyond that annual limit exceeds the lifetime exemption, which is $12.92 million in 2023. The $17,000 limit does not apply to gifts given to a spouse or political organization, or when you are paying someone else’s medical bills or college tuition.
Or just keep donating to your favorite charities who may need your contribution more than ever. Charities worry that a rough stock market and high inflation could limit donations from remaining donors.
“People are more generous when times are good, but people need them most when times are not good,” Astrinos notes.
This column was provided to The Associated Press by personal finance site NerdWallet. Content is provided for educational and informational purposes and does not constitute investment advice. Liz Weston is a columnist at NerdWallet, a certified financial planner and the author of Your Credit Score. Email: [email protected] Twitter: @lizweston.
NerdWallet: What is a Donor Advisory Fund and how does it work? https://bit.ly/nerdwallet-donor-advised-funds