Tis the season for year-end celebrations and charitable giving. No one wants to think about income taxes right now, but here’s an important reason to pay attention: Your charitable gifts can actually earn you a pretty big break on your tax bill next spring! Use these tips to strategize your generosity, and you can benefit yourself and others at the same time.
The charitable gift limit for tax deductions is quite high. You can donate a significant amount to charity while earning a tax deduction for yourself. Those who make non-cash gifts to charities can claim up to 30 percent of their adjusted gross income (AGI) as a deduction, and up to 60 percent of AGI via cash gifts! And if you donate in excess of those limits, you can carry over the deduction for up to five years in the future.
Charitable contributions can offset capital gains tax. You might know that selling assets held for more than one year can result in capital gains taxes on the profit. But if you donate that same asset to charity instead of selling it, you can deduct the value of the contribution from your taxable income.
Charitable contributions can also offset taxes on required minimum distributions (RMDs). Many retirees want to leave their assets in a retirement account for as long as possible, but are required to take minimum distributions beginning at age 72. If you feel concerned about the impact of these distributions upon your overall income (triggering additional income taxes) you can direct some or all of the RMD to a qualified charitable distribution instead. You can turn that additional tax liability into a deduction.
You must save proof of your charitable donations. Whether you make cash or non-cash gifts, hang onto receipts or statements that prove your donation. In the event that you’re audited, all deductions must be proven or they won’t be allowed.
You don’t have to decide upon a charity now. Establish a donor-advised fund now, and the money you move to the fund can serve as a tax deduction. Later you can choose charities and disburse the cash to them.
Working with a financial professional can help you uncover additional strategies. Because the charitable gift deduction can be so large, there are many ways to strategize to take maximum advantage of the opportunity. Discuss your plans with us ahead of time, so that we can help you make the most of your charitable gifts. But hurry; if you want to use them as a deduction on your 2022 taxes, the deadline for making charitable gifts is December 31.