Year-end is a time to celebrate the holidays with family and friends. Year-end is also a time for tax planning for the current year to help ensure that your tax bill is as low as possible. One tactic that many people use is year-end charitable donations.
From Giving Tuesday, which is the Tuesday after Thanksgiving, until year-end, we generally see a major uptick in charitable giving each year. This is a way to combine doing good for others and helping your own tax situation.
Important deadlines and restrictions to keep in mind
Charitable donations of cash, securities, other assets plus clothing, food and household items must be made by December 31 of each year in order to qualify for a tax deduction or other favorable tax treatment for that year.
In order to qualify for a tax deduction, donations must be made to qualified charitable organizations. The IRS site has a tool for checking if an organization meets the eligibility criteria for tax-favored gifts.
In order to qualify for a tax deduction, an individual’s itemized deduction must exceed the standard deduction limits. For 2022, the standard deduction is $25,900 for those who file married and joint. It is $19,500 for those who file as head of household, and the limit is $12,950 for single filers and those who file married and separate.
There are limits to the percentage of your AGI (adjusted gross income) that can be used as a deduction. For 2022, these limits are:
- Cash donations are limited to 60% of your AGI.
- Donations of securities and other long-term capital gain property are limited to 30% of AGI based on the fair market value when donated.
- Donations of tangible personal property are limited to 30% of AGI based on the fair market value.
- Cash donations are limited to 30% of your AGI.
- Donations of securities and other long-term capital gain property are limited to 20% of AGI based on the fair market value when donated.
- Donations of tangible personal property are limited to 20% of AGI based on the fair market value.
Donations in excess of these amounts can generally be carried over to a subsequent tax year.
The annual gift and estate tax exclusions for gifts to an individual do not come into play with charitable contributions.
Types of tax-efficient charitable giving strategies
There are a number of options for charitable giving.
Cash gifts to a charity entail writing a check payable to the organization. Donations can usually be made by credit card and other similar methods.
Gifting appreciated securities such as stocks, bonds, mutual funds or ETFs can offer a double benefit. The market value of the security can be used as a tax deduction. Additionally, there will be no capital gains taxes due on the unrealized gains on the security. Check with the organization first to be sure they can accept donations of this type.
Qualified charitable distributions (QCDs) are an option for holders of a traditional IRA who are at least age 70 and a half. These account holders can donate up to $100,000 from their IRA to a qualified charitable organization. While there is no tax deduction available, the money comes out of the IRA tax-free. This can be a tax-efficient way to donate to charity for those who cannot itemize.
Additionally, QCDs can be used to satisfy some or all of an account holder’s required minimum distribution (RMD) as well. This can help reduce their taxes on their RMD. The $100,000 limit can be over and above their RMD limit. The advantage of higher donations is that they can help reduce the impact of RMDs, and the taxes on those RMDs, in subsequent years.
Donor-advised funds are investment pools that allow donors to make a contribution into the fund in one or more years and then space out donations to one or more organizations over time. Donations to a DAF can be made with cash, appreciated securities, real estate, art and collectibles or other assets. They will be eligible for a tax deduction in the year of the donation to the fund.
Donor-advised funds are professionally managed to allow growth of the amount(s) donated to the fund. The owner of the fund can then choose to space out their distributions to the charitable organizations of their choosing over time.
Bunching charitable contributions into a single year can allow you to itemize your contributions for that year. For example, you might take the amount you would contribute to charity over three or four years and bunch those contributions into a single year. This can allow you to use those contributions as a deduction in that year whereas you might not be able to take a deduction if the contributions were spread out over several years.
Charitable contributions can be a win-win strategy. You can receive a tax deduction or other tax benefits. Additionally, your contribution can benefit worthwhile organizations that do good for others. Contact your Wedbush advisor to discuss year-end charitable giving options as part of your year-end tax planning.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.