Taking advantage of deduction strategies

As we approach the end of the year, many of our clients are looking for ways to lower their income taxes.

One way to achieve this goal while positively impacting others is to donate to charitable organizations.

Prior to discussing giving strategies, let’s review the charitable contribution rules. First, the IRS allows as an itemized deduction gifts of cash or property to organizations qualified under section 170(c) of the Internal Revenue Code. Unsure if the organization you are considering giving to is a qualified charitable organization? The IRS website provides a tax-exempt organization search tool that will help you determine whether an organization is considered tax-exempt and eligible to receive charitable contributions.

Second, the charitable deduction limits for 2022 are set at 60% of your adjusted gross income for cash gifts to public charities. Donated property is limited to 50% of your adjusted gross income and 30% for donations of capital gain property (stocks, etc.).

Third, since charitable contributions are itemized deductions, it is important to understand the rules behind itemizing deductions versus taking the standard deduction. The IRS allows taxpayers to take as a deduction against their income the greater of the standard deduction or the sum of their itemized deductions. The default is to take the standard deduction unless the sum of your itemized deductions is greater than your standard deduction. Some of the most common itemized deductions are medical expenses (greater than 7.5% of your adjusted gross income), state income and real estate taxes (limited to $10,000), mortgage interest and charitable contributions. The Tax Cuts and Jobs Act passed in 2017 nearly doubled the standard deductions for most taxpayers, greatly limiting the number of taxpayers who benefit from itemizing their deductions. For 2022, the standard deduction for individuals filing as single is $12,950 and $25,900 for those who are married and filing jointly. An additional $1,400 is added to the standard deduction for taxpayers over age 65 or blind. This may seem like bad news to those wanting to receive a tax benefit for their charitable contribution. Fortunately, as we will discuss below, there are still ways to maximize the benefits of your charitable contributions.

One charitable giving strategy for those that do not have enough deductions to benefit from itemizing is to “bunch” their charitable contributions for two tax years into one. The thought is that paying two years’ worth of charitable contributions in one year will push you over the standard deduction amount and allow you to itemize and benefit from the larger charitable contribution deduction. Then, the following year, you would make smaller or no charitable contributions and take the standard deduction. This “pre-paying” or “bunching” strategy allows you to maximize the benefits of your itemized deductions in one year and the standard deduction in the next.

Taxpayers with required minimum distributions from their IRAs should consider making a qualified charitable distribution directly from their IRA. This can be done by instructing the IRA custodian to send a check directly to the charity of the taxpayer’s choosing instead of the taxpayer receiving the money themselves and then writing a check to the charity. During 2022, charitable contributions directly from an IRA up to $100,000 can reduce dollar for dollar the taxpayer’s income and count against a taxpayer’s required minimum distribution. This is an especially good strategy for those taxpayers that do not itemize their deductions and, thus, do not benefit from the charitable deduction.

One of the best charitable giving strategies is to donate appreciated stock held for longer than one year. This allows the taxpayer an itemized deduction for the stock’s fair market value without having to sell the stock and recognize the gain. For example, let’s say Sally purchased 100 shares of Apple stock at the end of 2018 for $3,944. In December of 2022, she is thrilled that her 100 shares of Apple stock have grown in value to $14,650 and wants to donate the proceeds to her church. If she sells the stock and then donates the proceeds, she will have to pay tax on the gain and then take a charitable deduction. If she donates the stock directly to the church, she receives a charitable deduction of $14,650 and avoids recognizing a capital gain and paying tax on the sale of the Apple stock.

Several more helpful hints to remember when donating close to the end of the year are as follows. For a mailed donation to be counted for the 2022 tax year, it should be postmarked no later than Dec. 31, 2022, even if the charity does not receive the check until early January 2023. Donations made by credit card are deductible through Dec. 31, 2022, even if you do not receive your credit card statement until January 2023. Finally, be sure to obtain written acknowledgment of your gift from the charity and keep this acknowledgment with your 2022 tax records in case you ever need to support the donations you made.

Charitable contributions can be an excellent tool for making a positive impact in the community and, if done correctly, lowering your tax bill. It is always a good idea to reach out to your CPA if you have questions about charitable contributions and taxes.

Christopher Eldredge, CPA, is tax manager at Heard, McElroy & Vestal, LLC.