4 Charitable Deduction Options To Reduce Your Tax Bill in 2021
If using charitable deductions to minimize your tax liabilities is one of your tax strategies for 2021, you’re running out of time to max out contributions. You’ll want to make wise choices to get the most bank for your buck with your donations, advises The Wall Street Journal. There are several changes to tax laws that provide extra deductions for charitable giving as a result of the pandemic.
Understanding these changes, while reviewing older laws that are still in effect, can help you minimize your tax bill or maximize your refund.
1. Taxpayers Who Don’t Itemize Can Deduct Donations
Typically, to take advantage of charitable contribution tax deductions, you must itemize your deductions on Schedule A. However, this year, the IRS has waived that requirement for cash donations of up to $300 for individuals and $600 for married couples filing jointly. The Wall Street Journal states that this change could benefit more than 30 million taxpayers who stopped itemizing deductions since 2017.
Keep in mind, this deduction reduces taxable income, but not adjusted gross income, so it won’t make a difference in your tax bracket.
2. 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.
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3. Taxpayers Who Itemize Can Deduct More Than Usual
Taxpayers who itemize on Schedule A can deduct up to 100% of their adjusted gross income, up from 60% in the 2020 tax year. However, these donations must be directly to the charitable organizations, and not 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.
4. 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 deduct the full amount of the donation. The organization can opt to sell the stock for immediate cash.
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 2020 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 15, 2022.
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