3 Unique Charitable Giving Options that Qualify for Tax Deductions
December 8, 2022
Even if you make charitable contributions throughout the year, you may still be interested in non-traditional, out-of-the-box ways to qualify for tax deductions all the way up until the end of the year.
Earmarked holidays like Giving Tuesday (the Tuesday immediately after Thanksgiving) and the spirit of the holiday season offer opportunities to support your favorite charities. Not only do you gain a sense of personal satisfaction from your altruism, but your generosity may also reward you with a financial benefit, too. Charitable donations made by year-end will qualify as deductions on your 2022 tax return. Here are three effective and unique ways to leverage the tax benefits of your philanthropy.
1. DONOR-ADVISED FUNDS
A donor-advised fund (DAF) offers considerable flexibility to support your favorite causes, either now or in the future.
When you make an irrevocable contribution to or transfer money into the fund, the entire amount will qualify for a tax deduction, even if you do not make distributions to sponsoring charities from the fund in the same calendar year. For example, you could choose to transfer $50,000 into a DAF in 2022 and then not make contributions until 2023 or beyond, and your entire $50,000 donation can still be deducted on your 2022 tax return. Although the sponsoring organization controls the money in the DAF and the investment options you choose from, you can certainly recommend which investments to use.
For cash contributions to a DAF, the upper limit that you can deduct annually is 60% of your adjusted gross income.
With a DAF, you can enjoy the additional time you have to monitor charities and validate they are worthy causes. Other people may simply prefer to wait for the investments to mature so they can give a larger amount later.
2. CHARITABLE DISTRIBUTIONS FROM IRA ACCOUNTS
If you’re over 70½ years old, you can make a tax-free transfer of money from your Individual Retirement Account (IRA). These qualified charitable distributions (QCDs) can be made annually for up to $100,000 for individuals or $200,000 for couples who file jointly.
People over the age of 72 who must take required minimum distributions (RMDs) from their IRAs annually may also want to take advantage of this rule. Contributing the RMD to a worthy cause will maximize those dollars’ charitable impact because no taxes will have to be paid on the amount transferred to the charity.
To qualify for this benefit, you must make sure the transfer is made directly to the charity and that you don’t take possession of the RMD first. If you did, you would still owe a tax on the amount even if you eventually donated all of it to a charity.
While many charitable organizations qualify for QCDs, there are several types of charities that are not eligible to receive them. In order to receive QCDs, the organization must be a 501(c)(3) organization that is eligible to receive tax-deductible contributions. Some common charities which are not eligible are donor-advised funds, and private foundations (except those described in Internal Revenue Code Section 170(b)(1)(F).
3. NONCASH ITEMS
You can also consider donating items to charities that aren’t cash equivalents, such as shares of stock, artwork, collectibles, or even vehicles. The current market value of your gift can be taken as a tax deduction, however certain limits apply. When donating stocks, for example, you can only take a deduction that equals no more than 30% of your adjusted gross income. If items such as shares of stock or a piece of art have substantially risen in value since you purchased them, gifting those assets to a charity instead may help you to avoid any substantial capital gains taxes you would otherwise be required to pay should you sell the asset.
SUBMIT THE PROPER PAPERWORK
To claim a charitable contribution as a deduction, you generally need the receiving charity to provide a letter verifying the tax-deductible amount of your contribution. For the deduction to qualify, you also must contribute to an organization that has a 501(c)(3) tax-exempt status.
Additionally, you may need a written appraisal from a qualified appraiser, depending on the value of the item you’re donating. When filing your annual tax return, you or your accountant will also need to complete Form 8283 for noncash charitable contributions and Form 1098 for contributions of motor vehicles, boats, or airplanes.
REALIZE ESTATE TAX BENEFITS
Many high-net-worth (HNW) families use charitable giving to lower their estate taxes. For 2022, the federal estate tax is levied on estates valued at more than $12.06 million for individuals and $24.12 million for couples. In 2023, these limits will increase to $12.92 million and $25.84 million, respectively.
These thresholds, which were increased by federal legislation in 2017, are set to expire at the end of 2025. If the U.S. Congress doesn’t extend the deadline before then, the estate tax threshold would revert to previous levels. After indexing for inflation since 2017, those thresholds could be about half of what they are now. As a result, more HNW families would be affected and in need of strategies that could reduce the taxes on their estates. Charitable giving can be an effective way to remove assets from an estate and lower the impact of taxes on heirs.
MAXIMIZE THE BENEFITS OF YOUR CHARITABLE GIVING WITH TRINITY WEALTH MANAGEMENT
The holiday season is a year-end nudge to not only give to causes that matter to you but do so in a tax-advantaged way.
As always, Trinity Wealth Management can identify strategies that will help you realize tax benefits from your philanthropy while increasing the impact of your donations to the charities you support. Contact us today to allow us to help you maximize these opportunities before year-end.
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