If using charitable deductions is one of the strategies you’re planning to use to reduce your 2022 tax liability, you’re running out of time to max out your contributions. Additionally, there are changes to tax laws this year. For example, last year, the IRS allowed people who made cash donations to qualifying charitable organizations to deduct up to $300 per single person or $600 for married couples without itemizing those donations. This year, however, that change does not apply.
1. IRA Holders Can Make Qualified Charitable Distributions Up to $100,000
Investors who are over 70 ½ years old and hold traditional IRAs can minimize their tax liability on IRA withdrawals by donating up to $100,000 of account assets directly to IRS-qualified charities of their choice. The qualified charitable distribution (QCD), as it’s called, isn’t tax deductible, according to the IRS website. But the withdrawal can reduce income taxes and income-based Medicare premiums, since the withdrawal doesn’t qualify as income to the account holder. For account holders age 72 or older, the donations can count toward the IRA’s required annual payout.
2. Taxpayers Who Itemize Can Deduct Up to 60% of AGI
Taxpayers who itemize on Schedule A can deduct up to 60% of their adjusted gross income for cash donations to qualified charities. However, non-cash donations and donations to organizations that aren’t considered qualifying charities will not be eligible for that high of a deduction ceiling.
3. Avoid Capital Gains Tax by Donating Appreciated Stock and Crypto
If you’re considering selling stocks to make year-end charitable donations, think again. You can reap greater rewards by donating the stock itself as a charitable contribution. Under the new law, you can donate appreciated stocks or cryptocurrency that you’ve held longer than a year directly to an organization. You’ll avoid capital gains tax and be able to deduct the full amount of the donation. The organization can opt to sell the stock for immediate cash.
4. Bunching Contributions
If you find that the standard deduction is larger than your itemized deductions for the current tax year, but you still want to benefit from your charitable contributions, you have an option. You can maximize your tax benefits by bunching two years of charitable contributions into one and itemizing them. Then, the following year, you’ll take the standard deduction.
You can achieve the bunching strategy by contributing to a donor-advised fund. A donor-advised fund is a third-party charitable investment account that allows taxpayers to take immediate deductions for their contributions, but hold that money in an investment fund to be distributed as grants to IRS-qualified public charities whenever the accountholder determines it is appropriate.
Every second year, you would contribute the amount equal to two years of charitable contributions, and you would itemize your taxes for that year. The following year, you would make your charitable contributions from the donor-advised fund and claim the standard deduction.
Keep These Rules in Mind
When you get ready to declare your deductions for charitable giving, it helps to keep these rules in mind:
- Donations must be made to a qualified, 510(c)(3) organization
- If you’re ever audited, you’ll need proof of the donation in the form of a letter or receipt from the organization
- You cannot deduct funds from the portion of a donation that benefits the donor (such as receiving a free gift in exchange for your donation)
This year’s tax returns may look quite different from 2021 for many taxpayers. If you need help sorting it all out, consider booking an appointment with a tax advisor or tax accountant now so you can better prepare for April 18, 2023.
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