Charitable giving not only enables individuals to make a positive impact on society but also offers potential tax benefits. By strategically navigating the realm of charitable donations, taxpayers can reduce their tax burden while supporting causes they care about. In this article, Optima Tax Relief explores the key insights on how to save on taxes with charitable giving.
Charitable deductions are a powerful tool for reducing taxable income. To qualify, donations must be made to qualified charitable organizations recognized by the IRS. Cash, property, stocks, and even volunteer expenses can be eligible for deductions. However, it is crucial to maintain proper documentation, including receipts and acknowledgment letters from the recipient organizations, to substantiate your deductions.
Due to the Tax Cuts and Jobs Act of 2017, not as many taxpayers are choosing to itemize their deductions because the bill increased the standard deduction. In fact, only 10% of taxpayers itemized their deductions in 2021, compared to 33% in 2017. The standard deduction is $13,850 for single taxpayers and $27,700 for married couples filing jointly in 2023. Itemized deductions, such as charitable contributions and medical costs, are only advantageous when the total exceeds the standard deduction.
To maximize your tax savings when donating to charity, you can try the following:
- Bunching Donations: By strategically timing your donations, you can “bunch” multiple years’ worth of contributions into a single year. This approach allows you to itemize deductions in the year of the donation, potentially exceeding the standard deduction threshold and maximizing tax savings.
- Donor-Advised Funds (DAFs): Establishing a DAF enables you to contribute to a fund, receive an immediate tax deduction, and then recommend grants to charities of your choice over time. DAFs provide flexibility and allow you to donate appreciated assets, such as stocks, which can offer additional tax benefits by avoiding capital gains tax.
- Qualified Charitable Distributions (QCDs): Individuals who are 70½ or older can directly transfer funds from their traditional Individual Retirement Account (IRA) to eligible charities. These transfers, known as QCDs, count towards the required minimum distribution (RMD) but are not considered taxable income. QCDs provide a tax-efficient way to fulfill your charitable intentions while reducing taxable income.
Charitable giving provides an opportunity to support meaningful causes while optimizing tax savings. By employing strategies such as bunched donations, utilizing donor-advised funds, and leveraging qualified charitable distributions, taxpayers can make a significant impact while reducing their tax liabilities. It is crucial to consult with tax professionals or financial advisors to tailor these strategies to your specific circumstances and ensure compliance with IRS regulations. With careful planning, your charitable giving can become a win-win situation, benefiting both society and your financial well-being.