Winter is not far off and the end of the tax year is quickly approaching. For this reason, charitably-inclined taxpayers having not already done so should begin reviewing the charitable donations they have already made this year in order to determine which charities they would like to continue supporting and how much financial support they intend to provide before the end of the year.
While many might view donating to charity as something as simple as writing a check or entering your credit card number on a website, there are often many different tax considerations charitably-minded individuals should take into consideration in order to maximize the value of their charitable gifts while also maximizing the value of any deductions they might be entitled to as a result of said gifts.
The first thing taxpayers should be aware of when discussing charitable giving is the current standard deduction for 2019 – which is $12,000 for individuals and $24,000 for married couples filing jointly. The standard deduction is the amount taxpayers can subtract from their income if they don’t list “itemize” write-offs for mortgage interest, charitable donations, state taxes, etc. In other words, taxpayers are automatically entitled at a minimum to the standard deduction regardless of how much they gave to charity during the tax year; however, unless taxpayers have deductions (whether charitable or otherwise) that exceed the standard deduction, and in turn elect to itemize those deductions, they will not be entitled to additional charitable deductions above the standard deduction.
Another important item relating to charitable giving that taxpayers should be aware of is the need to obtain written acknowledgments from charities for any single contribution greater than $250. Without such acknowledgement, taxpayers cannot legally claim those charitable contributions on their tax returns. The receipt must indicate the amount given and state whether or not the taxpayer received a benefit in return for the contribution (e.g., free tickets, a meal, etc.) If the taxpayer received a benefit in exchange for the donation, the receipt must contain a good-faith estimate of the benefit’s value. The taxpayer may then deduct only the amount of the donation that exceeded the value of the benefit.
The following discussions highlight several strategies taxpayers might wish to employ in order to maximize their charitable giving while also maximizing their charitable deductions:
The Tax Jobs and Cuts Act of 2017 provided for a standard deduction that was nearly double what it had been the previous year. Given this, it is likely some taxpayers have felt less inclined to donate to charity given they have fewer tax incentives to do so. One possible solution to this lack of incentive may be referred to as “bunching” charitable gifts. This simply means that taxpayers could choose to “bunch” their gifts every other year and elect the standard deduction during the opposite years. For example, consider a taxpayer who gives $10,000 to charity each year. Given the current standard deduction of $12,000, unless the taxpayer can take additional deductions, there may be no reason for the taxpayer to itemize his or her tax return. Alternatively, the taxpayer could give nothing during the first year and then double the usual donation during the second year (i.e., $20,000.) This would allow the taxpayer to take a greater deduction every other year instead of simply taking the standard deduction each year.
Another option charitably-inclined taxpayers might wish to consider is a donor-advised fund. A donor-advised fund is simply a charitable investment account that enables donors to make gifts of cash, securities, etc. to a specific type of account. The gifts are allowed to grow tax free within the account and be distributed over time; however, the taxpayer is entitled to a deduction for the year in which the gifts are transferred to the account.
IRA Charitable Rollover:
A gift-giving strategy available to older taxpayers is the IRA charitable rollover. This method of giving allows taxpayers age 70 ½ or older to make direct donations of up to $100,000 annually from their Individual Retirement Accounts to qualified charities. These donations count as all or part of the taxpayer’s required minimum distributions, but the donations are not taxable and are not included as income. With that said, because these donations are not included as income, they cannot be deducted. Even so, this method of giving is a more advantageous way to give from a tax perspective than first taking a distribution from one’s IRA and subsequently giving same to charity. To do so would inflate the taxpayer’s adjusted gross income and possibly lead to a loss of other key deductions and exemption amounts – not to mention possibly subjecting the taxpayer to higher taxes for other reasons. It is important to note the IRA Charitable Rollover is only applicable to IRA’s and does not work with other types of retirement benefit plans such as 401(k)s. Furthermore, donations to private foundations and donor-advised funds do not qualify. It is also important to note that, although the IRA Charitable Rollover is only available to taxpayers age 70 ½ or older, taxpayers age 59 ½ or older may choose to withdraw some of their retirement plan assets and donate same to charity. Such donations avoid the 10 percent early-withdrawal penalty; however, taxpayers younger than 70 ½ do not qualify for the direct distribution to charities.
In the end, taxpayers should be aware of the number of options available to them when it comes to charitable giving. To determine which charitable-giving strategies best apply to you, speak with your tax preparer as soon as possible to avoid potential delays in giving before the end of the year.