Donate. Document. And Deduct.
Tax savings likely isn't your only motivation for charitable giving. Like many people, you have causes you hold near and dear and desires to leave a meaningful impact.
Charitable contributions include a variety of tax-saving opportunities you may not be aware of, and some most people frequently overlook. Developing a charitable giving strategy can maximize your wealth and contribution to the community.
Charitable giving will not eliminate what you owe in taxes but will help to lessen your tax burden. Many charitably inclined individuals don’t know they can maximize their donations by itemizing their deductions. In doing so, you waive the standard deduction, which is $12,950 for those filing single, $19,400 filing head of household, and $25,900 for married individuals filing jointly for 2022. And, with a little tax planning with your trusted advisor, you can utilize both the itemized and standard deduction using the bunching strategy.
For locals with a history of charitable giving, bunching your deductions can provide some big tax benefits. The bunching strategy is a charitable giving plan that bunches together contributions for a predetermined amount of years to maximize your itemized deductions when filing your tax return. For example, a taxpayer doubles up on as many deductions as possible in one year, aiming to itemize deductions in one year and then take the standard deduction the following year.
Suppose you sponsor a local nonprofit yearly. You could make your normal contributions throughout the current year, then prepay the entire subsequent year’s donation in a lump sum in December of the current year, thereby doubling up on the contribution in one year and having no charitable deduction for the shelter in the next year. Speak with your tax professional to determine whether to make contributions at the end of the current year or wait until the New Year.
Qualified Charitable Distribution
If you are age 70.5 or older, you can leave a lasting legacy and reduce your taxes by making qualified charitable distributions (QCDs). A qualified charitable distribution is when you transfer your funds from your IRA account to a charity. The only requirement is that your IRA trustee distributes funds directly from the IRA to the charity. *Note: distributions to private foundations and donor-advised funds don’t qualify for the QCD.
This strategy allows you to make a charitable contribution and take the standard deduction. There is no need to itemize deductions. Since these distributions are tax-free, you can’t claim them as deductions; however, QCDs count toward your minimum required distribution for the year. Depending on how much you give, you can avoid higher tax brackets and lower your AGI and benefit from tax provisions associated with Social Security income and the cost of Medicare B insurance premiums for higher-income taxpayers.
Caution: Any IRA contributions made after age 70.5 can diminish the tax benefits of this strategy. If you have made any post-age 70.5 IRA contributions, consult your tax professional before employing this strategy.
Documenting Charitable Contributions
To successfully claim your charitable deduction on your tax return, the IRS has a few documenting requirements for both cash and non-cash contributions.
For a taxpayer to deduct cash contributions, they must report the contribution with a bank record, a receipt, or a Payroll deduction record. To claim a contribution of more than $250, the taxpayer must provide a written acknowledgment letter from the qualified organization.
For non-cash contributions, the documentation requirements depend on the fair market value of the items at the time of the donation. Items of minimal value (such as underwear and socks) generally are not deductible. However, if the value is $250 or more, you need an acknowledgment letter from the charity. When a non-cash contribution is worth $500 or more, the IRS requires Form 8283, plus an acknowledgment letter with the return. When the donation is $5,000 or more, a certified appraisal of the item(s) donated is required. If you donated a used vehicle, you would need an acknowledgment letter and Form 1098-C from the charity accepting the vehicle.
When contemplating cash and non-cash donations, call your tax professional for further guidance about the documentation and required forms.