How to Maximize Your Charitable Contributions

18 Dec 2023 How to Maximize Your Charitable Contributions

When filing your tax return, you can use the standard deduction or itemize your deductions. For the 2023 tax year, the standard deduction is $13,850 for individuals, $27,700 for married couples filing jointly, and $20,800 for a head of household.

Charitable contributions can only be deducted if you itemize deductions unless you are over age 70 ½ and doing a Qualified Charitable Donation (QCD) as explained in the last paragraph below. Therefore, you must have enough deductions to exceed the standard deduction to receive any tax benefit from your contributions.

What counts as a deduction?

You can deduct donations to 501(c)(3) charities, which includes most churches and nonprofits. You can deduct both cash and non-cash donations, including appreciated assets. Unfortunately, you cannot deduct your time or service as a nonprofit volunteer. Any donations to an individual are also not allowed.

How much can you deduct?

For 2022, the deduction limit for cash contributions to qualified charities is 60% of the taxpayer’s adjusted gross income (AGI). The deduction for contributions on non-cash assets held for longer than one year to qualified charities is 30% of the taxpayer’s AGI. Contribution in excess of these limits may be carried forward for up to five years.

Bunching Deductions

One strategy taxpayers use is to “bunch” deductions into a single tax year to help maximize tax deductions. For example, an individual who donates to charity every year may choose to make two years’ worth of contributions within a single tax year instead and forgo donations in the other year. This enables the individual to maximize itemized deductions in year one and then take advantage of the standard deduction the following year.

AGI and Tax Bracket Planning

Individuals in higher tax brackets will receive greater benefits from each dollar of deduction. One dollar of the deduction is worth up to $.37 of federal tax savings for an individual in the 37% tax bracket, whereas an individual in the 24% tax bracket receives less of a benefit. Therefore, if your income varies from year to year, it may be beneficial to bunch deductions in a high-income year.

Individuals also need to be conscious of the AGI limitations on charitable deductions. If your charitable deductions exceed the AGI limitation, then excess deductions can be carried over to the following year. However, this scenario defeats the purpose of bunching charitable deductions into one year. Therefore, if you are bunching deductions, it is beneficial to do so in a year which your charitable deductions won’t be limited by the AGI limits.

Donation Strategies

The following are three strategies to consider when making charitable donations.

Donate Appreciated Assets

You can avoid the tax on capital gains when you donate non-cash appreciated assets held for longer than one year, such as stock, to a qualified charity. You can always use cash to purchase more stock, keeping your portfolio intact if you like.

Donor-Advised Funds

Donor-advised funds are also a great way to maximize your charitable deductions. A donor-advised fund is a type of charitable giving vehicle that allows donors to make a charitable contribution, receive an immediate tax benefit, and then recommend grants from the fund to charitable organizations over time.

Let’s say you typically donate $10,000 to one or more charities each year. You could contribute $50,000 to a donor-advised fund in a single year, realize the tax deduction and then disburse $10,000 to qualified charities over the next five years.

Qualified Charitable Distribution (QCD)

Another way to maximize your charitable contributions is to make a qualified charitable distribution – this is only available to those who are 70 ½ at the time of the distribution. A qualified charitable distribution is a direct transfer of funds, up to $100,000 per year, from your traditional IRA to a qualifying charity. You can elect to have the qualified charitable distribution treated as a required minimum distribution. Making a qualified charitable distribution enables you to exclude the distribution from your income, lowering your adjusted gross income. Of course, the distribution cannot be itemized as a charitable deduction; rather, it decreases your taxable income. This is advantageous for those over age 70 ½ who are not itemizing due to the standard deduction being greater than their itemized deductions.  If funds are in a 401(K) plan, they must first be transferred to a traditional IRA, and then the Trustee will make a direct transfer to the Charity on your behalf.

Contact Haynie & Company For More Information or Help With Your Tax Planning.