Most people no longer get a tax deduction when they donate to charity. This shouldn’t stop you from donating, but you might want to change your approach.
Typically, only taxpayers with itemized deductions can write off charitable contributions. The vast majority of taxpayers took the standard deduction instead, which was nearly doubled under the Tax Cuts and Jobs Act of 2017. (Temporary rules in the pandemic relief legislation that allowed taxpayers to deduct $300 in contributions in 2020 and 2021 without itemizing them have expired.)
It never makes sense to donate just to get a deduction. For example, if you fall into the 22% federal tax bracket, you’ll only save 22 cents on every dollar you donate. But if you’re charitable at heart, there may still be ways to get a tax deduction for your generosity through some schemes, or you can rethink how you give.
Donor-Advised Funding Isn’t Just for the Rich
When people’s itemized deductions approach the standard deduction limit, tax experts recommend “bundling” deductions, $13,850 for single filers and $27,700 for married couples filing jointly, through 2023. Bunching allows taxpayers to take a standard deduction in one year while shifting as many itemized expenses as possible to another year. For example, you might make your January 2023 mortgage payment in December or make two years of charitable contributions if you’re trying to minimize your deductions this year.
One way to focus your deductions is to use a donor-advised fund, an account that allows you to make a lump sum contribution over the course of a year and then distribute the money over future years, says financial advisor Mark Astrinos. To a charity of your choice. San Francisco Bay Area CPA and personal finance expert. Donor-advised funds are provided by major investment firms as well as universities, community foundations and various charities.
If a client typically donates about $5,000 a year to charity, Astrinos might encourage that client to make a three-year donation of $15,000 to a donor-advised fund. The donation would allow customers to exceed the standard deduction for single filers and potentially make other expenses, such as mortgage interest and property taxes, deductible again.
Donating stock could offer ‘double tax benefits’
Stocks that have soared in value since you bought them can create a huge tax bill when you sell them. You can avoid that bill if you donate your stock to a qualified charity or your donor-advised fund. If you are able to itemize the deductions, you can also deduct the current price of the stock on the day of the donation.
Astrinos gave an example of someone investing $10,000 in stock that is now worth $100,000. Selling the stock will generate a capital gain of $90,000, while donating the stock will generate a $100,000 deduction and avoid capital gains tax.
“It’s a double-tax benefit,” Astrinos said.
Consider donating from your IRA after age 70
Qualified charitable distributions allow people age 70½ and older to contribute to charity directly from their Individual Retirement Account or IRA. There is no tax cut, but the money doesn’t count toward their income either.
Qualified charitable distributions typically appeal to people who face minimum distributions required for retirement accounts but don’t need income, Astrinos said. (The IRS requires people to withdraw a minimum amount from most retirement accounts starting at age 72 — and pay taxes on that income.)
Consider Gift Exemption Limits for Direct Gifts
The IRS places other restrictions on charitable deductions, such as requiring the recipient to be a “recognized charity” — a tax-exempt organization on the IRS list. Gifts to individuals and political organizations are not eligible.
If you’re not going to receive a tax deduction for your generosity, you can expand your list of worthy causes you’d like to benefit from. You can contribute to a political cause, help reduce a friend’s student loan debt, or pay someone’s rent if they’re struggling. However, if you make a personal donation, you should be aware of the annual gift exemption limit. You can give up to $17,000 to any number of people through 2023 without filing a gift tax return. You won’t owe any gift taxes until you donate more than your annual limit beyond your lifetime tax exemption ($12.92 million in 2023). The $17,000 limit does not apply to gifts to spouses or political organizations, or if you pay for someone else’s medical bills or tuition.
Or you can keep donating to your favorite charities, which may need your donation more than ever. Charities worry that volatile stock markets and high inflation could limit giving from remaining donors.
“People are more generous in good times, but they need generosity most in bad times,” Astrinos noted.
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This column was provided to The Associated Press by personal finance site NerdWallet. The content is for educational and informational purposes only and does not constitute investment advice. 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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NerdWallet: What is a Donor Advised Fund and how does it work?