As 2022 draws to a close, many American taxpayers are thinking of charitable donation strategies that make the most sense for their finances, despite any contemporary economic burdens.
The rules for charitable donations were expanded in 2020 and 2021 as part of COVID-19 recovery, but in 2022, the rules and limits reverted back to normal, with charitable contribution caps dependent upon what kind of donation you are making and limits based on a percentage of your adjusted gross income (AGI). Temporary provisions made it possible to deduct $300 from donations without itemizing. Now, you have to itemize to claim a deduction.
An organization must qualify for tax-exempt status before being granted tax benefits and the Internal Revenue Service (IRS) has an extensive list of qualifying organizations.
Maximizing charitable giving is as gracious an act as one can perform, but doing so in the most tax-efficient way is prudent to boot. Here are four widely-accepted charitable deduction options to reduce your tax bill for 2022.
1. Bunching Deductions Through a Donor-Advised Fund
Writing for the Associated Press (AP), Liz Weston stated that experts recommend taxpayers “bunch” their deductions to maximize total tax deductions over two years. An easy way to do this is through a donor-advised fund, which allows you to “take the standard deduction one year while moving as many itemized expenses as possible into another year.” Doubling up on your contributions in one year will enable you to immediately receive the deduction before giving away the funds over the course of the next 24 months.
2. Donating Appreciated Assets
As Think Advisor reported, Charityvest’s most preferred charitable giving strategy is donating appreciated assets. By contributing stocks, bonds or mutual funds directly to a charity, a donor avoids paying capital gains taxes on the asset’s growth while benefiting from a full market value of the asset at the time of the donation.
To use San Francisco financial advisor Mark Astrinos’ example as outlined by Weston, an investor would get a “double tax benefit” by donating $100,000 worth of shares that had appreciated from an original cost of $10,000. Selling the shares would create a $90,000 capital gain, but donating the shares would create a full-value $100,000 deduction and allow the investor to avoid the capital gains tax.
3. Set Up a Qualified Charitable Distribution From Your IRA if Over 70 1/2
Retired taxpayers older than 70 1/2 can make qualified charitable distributions (QCDs) to minimize their tax liability. QCDs are direct donations made to a qualified public charity from a donor’s traditional IRA. The amount donated, up to a maximum of $100,000, is not a deduction but an exclusion from the account holder’s gross income total. However, CNBC noted that for those aged 72 or older, the donations may count toward the IRA’s requisite annual payout as required minimum distributions.
4. Donating Depreciated Assets
Taxpayers can also benefit from selling slumping stocks, bonds or mutual funds and using that cash as a donation to an eligible charity. Not only can capital losses be utilized to offset any tax liability due from gains on other securities, but you may also be able to deduct net capital losses on income taxes, according to Stephen Kump, co-founder and CEO of Charityvest.
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