Time is running out, however, with contributions needing to be completed by December 31 to be eligible for a tax deduction this year.
Also, be advised that waiting to donate until the Times Square New Year's Eve ball is about to drop could be a bad idea as it can take longer to contribute some types of assets than others, so tax pros recommend you plan accordingly.
Standardized Deduction Increases Means Some May Not Itemize
TurboTax says almost 90 percent of taxpayers claim the standard deduction and do not itemize their charitable donations, and that number could be growing as the IRS continues to raise the standard deduction amounts.
For 2022 taxes the standard deductions are:
Single taxpayers: $12,950
Married taxpayers filing a joint return: $25,900
Heads of households: $19,400
There are even special circumstances that can increase your standard deduction beyond the baseline:
Single or head of household
o 65 or older: Increase $1,750
o Blind: $1,750
o 65 or older and blind: $3,500
Married, Widow, or Widower:
o One spouse 65 or older or blind: $1,400
o One spouse 65 or older and blind: $2,800
o One Spouse 65 or older, both spouses blind: $4,200
o Both spouses 65 or older: $2,800
o Both spouses 65 or older, one spouse blind: $4,200
o Both spouses 65 or older, both spouses blind: $5,600
“Claiming the standard deduction is certainly easier. To itemize, you need to keep track of what you spent during the year on deductible expenses like out-of-pocket medical expenses and charitable donations,” says TurboTax.
You also need to maintain supporting documentation such as:
Acknowledgment letters from charitable organizations
Tax documents reporting the mortgage interest, real estate taxes, and state income taxes you paid during the year.
“Then you need to determine whether your available itemized deductions exceed the standard deduction for your filing status,” says TurboTax. “That might sound like a lot of work, but it can pay off if your total itemized deductions are higher than the standard deduction.”
Beyond Check Writing: 2 Ways to Max Year-End Giving
There are ways beyond simple check writing to help offset your tax burden with year-end giving.
“As you think about charitable giving this year, you might have additional opportunities to help reduce your taxes—while maximizing your support for your favorite nonprofits during this time of need,” says Fidelity Charitable.
Two ways to max year-end giving behind donating cash according to Fidelity Charitable include:
Donate Non-Cash Assets: A lot of taxpayers make charitable donations of clothing and household items to organizations like Goodwill or the Salvation Army, but taxpayers can also donate assets like stock and mutual fund shares to charities.
Fidelity Charitable says that instead of selling stocks and mutual fund shares and then donating the after-tax proceeds, take a bigger tax advantage by donating the actual shares. If you have owned the shared for more than a year you will get two benefits from this strategy:
o You typically will be eligible to claim a tax deduction in the amount of the full fair market value
o Neither you nor the charity will pay any taxes on the gain
Fidelity Charitable says this strategy allows you to give as much as 20 percent more to charity than if you had sold the asset and donated the after-tax proceeds.
Combined Gift Can Maximize Deductions: Fidelity Charitable also says that a charitable gift that combines cash and long-term appreciated securities may create a larger deduction than contributing securities alone.
“Donations of publicly traded stocks, bonds, or mutual funds that you’ve held for more than a year are generally deductible at fair market value, and current year deductions can be in amounts up to 30 percent of your adjusted gross income (AGI). Meanwhile, when you donate cash, generally you can give up to 60 percent of your AGI and deduct the contribution in the current year,” says Fidelity Charitable.
If you combine cash and stock contributions, the IRS has an ordering mechanism in place to determine which deductions are taken first and to what extent. It’s also possible to carry forward any unused deductions for up to five years.
Consider Charitable Donations in Two-Year Cycles
As the standard deductions increase and fewer taxpayers meet the threshold to itemize, some are bunching their charitable donations in two-year cycles.
A couple, for example, that gives $10,000 each year, could give $20,000 in December to cover charitable giving for the current year and the coming year, making itemizing more logical for that taxpayer.
Then in 2023, they could take the standard deduction and then repeat the bunched giving again in 2024.
“In addition to achieving a large charitable impact in 2022, this strategy could produce a larger two-year deduction than two separate years of itemized deductions, depending on income level, tax filing status, and giving amounts each year,” says Schwab Charitable, which also runs a donor-advised fund.
Remember that IRS rules and regulations can be complicated so always seek the advice of a tax professional before executing year-end giving strategies.
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