The fall season brings cooler temperatures, vivid outdoor colors, and the promotion of pumpkin spice lattes among other things, but it also brings thoughts that this year is almost over. While not as enjoyable as a hot drink on a cool morning, it is a great time to consider your tax situation. If you are predisposed to be charitable, there are a couple of strategies you can take that will maximize your contributions and minimize your taxes, but like most things this requires some knowledge and planning to be effective.
The increase in the standard deduction for taxpayers beginning in 2018, dramatically reduced the number of taxpayers who itemize their deductions. Not only did the standard deduction dramatically increase, but state and local taxes (SALT) were limited to a maximum of $10,000 if married filing jointly making it much harder for taxpayers to qualify if their itemized deductions were made up primarily of these taxes. If you are one of those people who used to itemize because you made significant charitable contributions and had large deductions for SALT, there is still a way to group your charitable deductions and minimize your taxes.
To understand if itemizing makes sense for you, let’s review what the standard deductions are for the 2021 tax year. 2021 standard tax deductions are $12,550 for single filers and for those married individuals who file separately. If you are married and file a joint return, the deduction increases to $25,100 and if you are a head of household filer it is $18,800. In other words, if you are going to itemize your deductions, then you need for them to total more than these amounts for it to begin to make sense.
Let’s assume you no longer itemize because your deductions are less than these amounts, however you make significant charitable contributions. Instead of making let’s say $10,000 in contributions in one year for three years in a row, you group your charitable deductions and make $30,000 in charitable contributions in one of the years in which you itemize and then nothing in the other years. You still make the same total charitable contributions; you just do it in one of the three years. Making this large contribution in one year versus over three years, may require some forethought and planning, but it can save significantly on taxes.
According to IRS publication 526, the amount you can deduct for charitable contributions is generally limited to no more than 60 percent of your adjusted gross income. The publication states there are lower limits of 20 percent, 30 percent, or 50 percent depending upon the property you give and the type of organization you give it to. Keep in mind though you can carryover contributions that exceed these limits to for up to five years.
If you don’t itemize your taxes, you can still deduct $600 of charitable donations for married filing jointly and $300 for other filers in the 2021 tax year.
Another way to save on taxes is to use a donor-advised fund for your charitable giving. This involves establishing an account and funding it with cash, stocks, or even a private business interest. You can get a tax deduction while the funds you donate can continue to grow and you get to determine what qualified charities you want to support. The advantage of donating appreciated assets is that you get to take a deduction for the fair market value of the appreciated asset you grant to the account, while avoiding the capital gains tax that would be due if you sold the asset and donated the proceeds directly. Keep in mind that when you contribute assets to a donor-advised fund you are making an irrevocable commitment that the funds will be used for charitable giving, so you want to make sure of your intent.
If you have any questions on charitable giving before the end of the year, please schedule a consultation through our website. We’d love to assist you making charitable contributions in a tax-smart manner.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.