Are you looking for a way to save on taxes while supporting charitable causes? Look no further! By strategically planning your charitable giving and following tax law requirements, you can achieve significant tax savings through tax-deductible donations. Let me show you how.
Which charitable donations are tax-deductible?
Donations of money or property to qualified charitable organizations can reduce your income tax liability. To qualify, the organization must be a nonprofit, tax-exempt entity under tax Code section 501(c)(3). These organizations include those with religious, charitable, scientific, educational, or other public service purposes. You can also support organizations that foster amateur sports competitions or prevent cruelty to children or animals. Additionally, certain governmental entities may also qualify.
However, be cautious of scams and fake charities. You can check an organization’s eligibility by searching the Exempt Organizations Business Master File on the IRS website. Keep in mind that some newly formed organizations may not be listed yet due to processing delays.
Requirements for charitable deductions
To ensure your charitable contributions are deductible, they must comply with federal tax rules. Tools like TurboTax’s ItsDeductible can help you determine if your donation qualifies and how much you can deduct.
Remember, you cannot deduct contributions that benefit specific individuals or provide you with a direct benefit (“quid pro quo”). For example, if you attend a charity dinner, only the portion exceeding the fair market value of the meal is considered deductible. The sponsoring organization should disclose the deductible amount.
Depending on the type and value of your gift, substantiation, donee acknowledgement, valuation, and appraisal requirements may apply. TaxAct and other tax-preparation tools provide instructions for reporting charitable contributions and any applicable limits.
Standard deduction or itemization?
Deciding whether to take the standard deduction or itemize is a crucial step. Generally, itemizing is beneficial if your total itemized deductions, including charitable contributions, exceed the standard deduction. Unfortunately, the provision that allowed individuals to claim the standard deduction and deduct up to $300 of contributions has expired.
Understanding the requirements and interplay between the standard deduction and itemizing can lead to considerable tax savings. Playbook, an online tool, recognizes this relationship and offers tax-efficient financial planning strategies.
AGI ceilings
The amount of charitable deductions you can claim may be limited based on your adjusted gross income (AGI) for the year. Public charities, like the American Cancer Society or Habitat for Humanity, allow deductions of up to 50% of your AGI. Cash or check donations have a higher limit of 60% of AGI. On the other hand, gifts to private foundations or non-cash donations of capital gain property held for a year or longer are capped at 30% of AGI.
If your contributions exceed these limits, you can carry them forward for up to five years. However, be aware of the applicable AGI limits in the year you claim the carryforward deductions.
Planning opportunity: Bunching
If your total charitable contributions won’t exceed the standard deduction in a single year, consider “bunching” your donations. By grouping your contributions into a single year, you may surpass the standard deduction amount, resulting in greater tax savings. The extra deductions will be multiplied by your top marginal tax rate, leading to substantial savings.
For example, if you expect a lower income year in 2023 and a higher income year in 2024, you can delay your donations to 2024 and combine them with that year’s contributions. This strategy can maximize your tax benefits.
Gifts of appreciated property
Donating appreciated property directly to a charity can provide greater tax savings than selling the property and donating the cash. As an itemizer, you can deduct the fair market value of the property, and if you qualify, you may avoid capital gains tax on the appreciation.
The tax rate on the appreciation depends on your income bracket. If you have taxable income below certain thresholds, you may pay no tax or a lower tax rate on the capital gain. Don’t forget to check if the charity accepts the type of property you want to donate.
Charitable trusts
Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) offer high-net-worth individuals opportunities for income, estate, and gift-tax planning. Setting up these trusts involves complex legal, tax, and financial considerations, so seek professional advice if you’re considering these options.
A CRT provides income to beneficiaries for a specific term or lifespan while producing tax savings and furthering charitable goals. On the other hand, a CLT makes payments to charities for a period of time and transfers the remainder to non-charitable beneficiaries. CLTs are commonly used for estate or gift-tax planning.
Donor-advised funds
Donor-advised funds (DAFs) are gaining popularity as a way to manage charitable giving and maximize tax savings. You can claim an itemized deduction for your contributions to DAFs, and although you can’t reclaim the funds, you can recommend how they are invested and which charities should receive them.
DAFs are particularly useful for offsetting high tax liabilities resulting from unexpected income. They can provide greater tax savings compared to direct contributions to charities spread over several years. Fidelity and Vanguard are among the investment firms offering DAFs.
RMDs: Exclusions for qualified charities
If you have a traditional IRA and have reached the age when you must take required minimum distributions (RMDs), consider making qualified charitable distributions (QCDs) directly to charities. By instructing your IRA trustee to transfer up to $100,000 of your RMDs to a qualified charity, you can exclude that amount from your taxable income. This exclusion can lower your overall tax liability.
Furthermore, even if your total itemized deductions are lower than the standard deduction, you can still claim the full standard deduction while benefiting from QCDs.
TIME Stamp: Tax law incentivizes charitable contributions
Now that you know the secrets of maximizing your tax savings through tax-deductible donations, it’s time to take action. Explore the various opportunities available, from direct contributions to DAFs, charitable trusts, and IRA distributions. Make sure to consult experts for more complex strategies.
Don’t miss out on the tax benefits of giving back to the community. Start planning your charitable donations today and enjoy the rewards of both helping others and improving your financial situation.
[AGI]: Adjusted Gross Income | [DAFs]: Donor-Advised Funds | [CRTs]: Charitable Remainder Trusts | [CLTs]: Charitable Lead Trusts | [RMDs]: Required Minimum Distributions | [QCDs]: Qualified Charitable Distributions