Charitable donations are not only beneficial for recipients, charitable donations benefit the ones donating as well. Mindful structuring of contributions can have tax advantages for the donor. There are a few ways to realize those advantages. Some are: gifts of appreciated stocks, donor-advised funding, grouping donations to have a greater deduction than the standard deduction, and IRA gifts.
When donating appreciated stocks that are held for more than a year, you are essentially donating more than if you would have sold the stock and made a cash donation. You are doing so by avoiding the capital gains tax from selling the stock. There is a 20% maximum federal capital gains tax on long-term holdings. By donating the stock directly to charity, you are completely avoiding the capital gains tax. The organization receiving the stock can sell it immediately or add it to its investment portfolio. The donor, if itemizing, is able to deduct the full fair market value of the asset that was donated. Appreciated assets can include not only ones publicly traded but those that are not as well.
Donor-Advised Funding is an account created at a public charity established for the sole purpose of supporting charitable organizations. The account gives donors the opportunity to make a charitable contribution to the account, instantly receive a tax deduction, and then recommend grants. The donors are able to contribute to the account as much or as little as they like. They can recommend grants to whatever charitable organizations they want. The public charity sponsoring the account will perform due diligence to ensure the funds granted go to an IRS-qualified public charity and are used for charitable purpose. The first step in creating a donor advised fund is making a contribution of personal assets. The donation can include anything from stocks to real estate. The donation will be shown in the fund account. When you make the donation to your donor-advised fund, that is a deductible charitable donation, even if it is not immediately used for a donation to a specific charity. However, the deduction amount depends on a few things, including the kind of asset and how long it has been owned. The way this is set up allows a person to plan gifts to get the optimal tax deduction. Bear in mind that the donations to charity from the fund are not tax deductions for the donor. That deduction was taken when the account was funded.
Grouping donations is another way to achieve a deduction greater than the standard deduction. There are ways to organize deductions to surpass the standard deduction threshold, which in 2022 is $12,950 for single or married filing separately, $19,400 for head of household and $25,900 for married filing jointly or surviving spouse. Unless your itemized deductions exceed the standard deduction, there is no tax benefit for making charitable contributions; however, with structuring charitable giving you might be able to go over the standard deduction. You can do this by donating two years’ worth of contributions in one year. For example, if a married couple filing jointly donates around $12,000 a year to a charity and has deductible property taxes are $10,000, itemized deductions would total $22,000 so it would be best to take the higher $25,900 standard deduction. Now, if they bunch the charitable deductions by making two years’ worth of donations in one year, their itemized deductions of $34,000 would exceed the standard deduction.
Making a gift through your IRA is a great way to contribute to a qualified charity. As long as you are 70 ½ years old or older you are able to donate up to $100,000 from your IRA directly to the charity without having to pay federal income taxes on the money. This option is commonly called the IRA charitable rollover or is also known as the qualified charitable distribution (QCD). There is now no expiration date on this law. When gifting from your IRA you will pay no federal income taxes as the transfer is neither taxable income nor a tax deduction, which means you will benefit from this even if you do not itemize your deductions. Your money must be sent directly from your IRA to the charity. Required minimum distributions (RMDs) must begin at age 72, but any QCDs made before 72 will not offset RMD amounts. There is no carry forward for future year RMDs. While the maximum total QCD continues to be $100,000, this amount may be reduced if you continue to make IRA contributions after 70 1/2. So effective for QCDs made after 2019, the $100,000 QCD allowance for that year is reduced (but not below zero) by the aggregate amount of any IRA contribution claimed as a deduction. TAXPAYER ALERT, it is imperative that you advise your tax preparer if you are making QCDs since those transfers to charity are NOT reflected on the 1099-Rs issued for IRAs.
For more information on tax efficient ways to benefit the charities close to your heart, please contact us.
Article Submitted by Lilli Schafer.
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