Donating to charities offers a wealth of benefits that extend far beyond the act of giving. It empowers individuals to make a positive impact on causes they deeply care about. Through charitable contributions, critical resources are given to people in need, strengthening communities and promoting compassion. Moreover, the tax benefits associated with charitable donations provide a compelling incentive for philanthropy, encouraging individuals and businesses to participate in social responsibility. In this blog, we delve into the deductibility of charitable donations and offer insights on how to ensure your contributions count.
Qualifying for the Deduction
To qualify for the deduction, the recipient organization must be officially recognized as a nonprofit, charitable, religious, educational or government entity. Proper documentation, such as receipts or acknowledgment letters, is essential for claiming the deduction. Additionally, certain limitations may apply based on your adjusted gross income (AGI) and the type of property donated. You can generally claim charitable contributions if they’re less than 60% of your adjusted gross income. Depending on the type of property and the organization, the IRS may further limit your contributions to 50%, 30% or 20% of AGI. Any contributions exceeding the AGI limits may be carried forward for up to five years.
Itemized Deduction
To fully leverage the charitable contribution deduction, taxpayers generally must itemize their deductions. While a temporary $300 charitable deduction was allowed for those taking the standard deduction in 2020 and 2021, this provision no longer applies.
Bunching
Bunching is a common strategy used by taxpayers to maximize their tax savings. Instead of making smaller annual donations, individuals’ “bunch” or consolidate several years’ worth of charitable contributions into a single tax year. By doing so, they exceed the standard deduction threshold and become eligible to itemize deductions, potentially reducing their taxable income significantly. Bunching allows taxpayers to leverage their charitable giving by concentrating it in specific years in order to achieve a more substantial deduction. In non-bunching years, they may opt for the standard deduction.
Donating Appreciated Stock
Donating appreciated stock to charities brings an additional tax benefit. By making such contributions, donors can deduct the fair market value of the stock on the date of the donation, effectively reducing their taxable income. Additionally, perhaps the most significant perk lies in bypassing capital gains taxes on the appreciated value of the stock. This powerful strategy can prove particularly advantageous for those with highly appreciated assets. However, it’s important to keep in mind that this type of donation is subject to a 30% AGI limit, meaning the deduction cannot exceed 30% of the donor’s AGI.
Deductions for Volunteers
Volunteers should not overlook tax deductions related to their service. Although the value of time or service cannot be deducted, expenses incurred while volunteering for qualified organizations can be counted as tax-deductible donations. This includes mileage driven to charitable events or to volunteer opportunities.
Qualified Charitable Distributions
For those aged 70 1/2 and older, utilizing a Qualified Charitable Distribution (QCD) from their IRA offers unique advantages. A QCD allows individuals to donate up to $100,000 directly to charitable organizations from their IRA without counting it as taxable income. This provision serves as a valuable tool to fulfill required minimum distributions (RMDs) from the IRA while supporting charitable causes.
In conclusion, strategic planning and leveraging the tax benefits of charitable contributions enable individuals to simultaneously reduce their tax burden and make a positive impact on the community. By understanding the intricacies of charitable contribution deductions and employing effective strategies like bunching, donating appreciated stock, or making QCDs, you can amplify your charitable efforts and create a lasting legacy of compassion and change.
