Charitable Giving Tax Planning
by Gabriel Lewit
Charitable donations are a great way to reduce your taxable income while also donating to a good cause and improving your community. The benefits of donating to charitable organizations go beyond just reducing your income tax; it is a fantastic way to also help save money for your beneficiaries.
There are several different tax strategies that you can use when giving to charity to lessen your tax burden. Read on to learn how to reduce your tax liability while also maximizing your charitable impact.
Our financial advisors and tax specialists at SGL Financial can help you sort through all of your tax-related questions. Contact us today
Creating a Charitable Giving Plan
When creating your plan, there are a few things to consider before you begin giving money to a good cause.
First and foremost, you need to decide on what cause you have in mind. There is certainly no shortage of charitable causes to choose from, with everything from cancer research, helping the homeless, to helping sick children with deadly diseases. Once you have determined what cause you want to donate money towards, find a qualified organization that will allow you to claim a tax deduction on your donation. Whenever you are donating money, always make sure to:
- All donations of $250 or more (especially cash donations) will require a receipt
- Itemize deductions on your tax return
- If you are donating higher net worth items, get an independent appraisal
- Consult a tax professional to help ensure all your charitable distributions are accounted for and set up in an optimal way to receive the full tax benefits
Some employers have a charitable matching program where they will match your contributions. It certainly doesn’t hurt to inquire with your employer on whether or not they will match your donations to further help the cause.
Are Charitable Contributions Tax-Deductible?
Generally speaking, you can deduct up to 60% of your adjusted gross income, or AGI, through charitable donations. However, depending upon the type of contribution as well as the organization, you may be limited to 20%, 30%, or 50%.
Regardless of the amount of organizations you donate to, the limit will apply throughout the entire tax year. Contributions that exceed the limit during the current tax year may be counted as deductible contributions on your tax returns for up to the next five years. To claim these donations as deductions on your taxes, you must itemize your tax return and bypass taking the standard deduction, and file a Schedule A.
Charitable donations can certainly be a great way to reduce your tax liability. However, research ahead of time to see if itemizing your deductions is worth it. Itemizing your deductions can be time-consuming and cost more money; you will need to pay more for tax software or pay your tax advisor for more hours to itemize everything. Furthermore, your standard deduction may be more than what you would receive in deductions had you itemized, so it may make more sense to just take the standard deduction.
However, if you decide against itemizing, you cannot take any deductions for whatever you decide to donate. Research the 2023 standard deduction rates and decide which option is better for reducing your overall taxes.
What is the Benefit of a Qualified Charitable Distribution?
A qualified charitable distribution (QCD) allows taxpayers 70½ years old or older to donate up to $100,000 toward qualified charities from a taxable IRA instead of taking their required minimum distributions (RMDs).
QCDs can help taxpayers avoid jumping into a higher tax bracket, as well as prevent phaseouts of other types of tax deductions. These phaseouts either limit or totally eliminate different kinds of deductions, such as itemized deductions, as well as incur higher taxes on Social Security income. If you are married, each spouse can contribute up to $100,000 towards a QCD, increasing your total potential limit to $200,000 per married couple.
All QCDs can be made to specified charitable organizations defined in the tax code. They cannot be made to donor-advised funds or private foundations or organizations. If you are looking to reduce your tax liability with QCDs, do research ahead of time to ensure that the prospective organization you are considering qualifies for the tax deduction.
Consult a Tax-Professional for Help
Tax planning can be strenuous and time consuming. There is no shortage of different tax liabilities for taxpayers of all brackets, and the subsequent solutions are numerous, and often complex. However, your tax situation may not be quite as complex as it may seem.
With the help of one of our tax professionals at SGL Financial, you can rest assured that whatever your tax situation or concerns are, we can help make things a little more transparent and help you develop the right plan for your financial situation. Contact us today and see how we can help.