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Greg O’Brien, CPA, CTS
December 22, 2023

Charity & Taxes: Guide to Tax-Free Wealth

As the year draws to a close, both charities and individuals embark on a mission to make a positive impact through generous donations. But did you know that charitable giving can also provide significant tax benefits? By understanding the ins and outs of tax deductions and strategically planning your donations, you can not only contribute to causes you care about but also optimize your tax situation. In this comprehensive guide, we will explore the concept of tax-free wealth and delve into the strategies and considerations for maximizing your charitable deductions. So let's dive in and discover how you can make a difference while reducing your tax burden.

Unlocking the Potential of Tax Optimization and Charitable Giving

Tax Strategist's Guide to Charitable Donations: A Brief Overview

Before we delve into the nitty-gritty of tax deductions, let's first understand the basics of charitable donations. A charitable donation refers to the act of giving money or goods to a tax-exempt organization, which in turn can reduce your taxable income. These organizations, recognized by the IRS as 501(c)(3) entities, include religious organizations, non-profit educational agencies, museums, and more. However, it's essential to ensure that the organization you donate to is IRS-qualified to claim a deduction on your taxes.

Understanding Charitable Deductions To Achieve Tax Optimization

Charitable deductions serve as a tool to lower your taxable income and, subsequently, your tax bill. Generally, you can deduct up to a certain percentage of your adjusted gross income (AGI) through charitable donations. The exact percentage depends on the type of contribution and the organization you donate to. For example, cash donations to eligible charities can typically be deducted up to 60% of your AGI.

It's important to note that the deduction limit applies to all donations made throughout the year, regardless of the number of organizations you contribute to. If your contributions exceed the limit, you can carry over the excess amount to future tax returns for up to five years.

Documenting Your Charitable Contributions: The Key to Claiming Deductions

To claim a deduction for your charitable donations, proper documentation is crucial. It's essential to keep track of your contributions, regardless of the amount. For monetary donations, acceptable documentation includes bank or credit card statements and receipts from the charity. If you donate through automatic deductions from your paycheck, retain copies of your W-2 or pay stubs as proof.

In certain cases, additional documentation is required. If your cash or property donations exceed $250, the IRS mandates a written acknowledgment from the charity. This acknowledgment should include the amount of cash donated, any goods or services received in exchange, and an estimate of their value. For noncash donations exceeding $500, complete Form 8283 and attach an appraisal if the items' total value exceeds $5,000.

Volunteering for Tax Deductions: It's Not Just About Money

While you cannot deduct the value of your time or service, certain expenses incurred while volunteering can be counted as tax-deductible donations. These expenses must be directly related to your volunteer work, not previously reimbursed, and not personal or living expenses. For example, mileage driven to charitable events or donation sites can be included as part of your tax-deductible donations. You can deduct your actual expenses, such as gas receipts, or use the standard mileage deduction, whichever is more advantageous.

CPA Insights: Important Deadlines to Remember

To ensure your donations are tax-deductible for a specific year, they must be made by the end of that tax year. For instance, if you want to claim deductions on your 2023 tax return, your donations must be made by December 31, 2023. The IRS determines the donation's delivery date based on various factors, such as the mailing date for checks, the date of credit card charges, or the date an option is exercised by the charity.

Tax Optimization Through Itemizing: When to Choose Over Standard Deduction

To claim tax-deductible donations, you must itemize your deductions on your tax return. This involves listing out all your deductible expenses, including charitable gifts, rather than taking the standard deduction. Itemizing can be more time-consuming, but it can be financially beneficial if your total deductions exceed the standard deduction amount.

It's important to note that the standard deduction varies depending on your filing status. For the tax year 2023, the standard deduction amounts are as follows:

Single: $13,850

Married, filing separately: $13,850

Married, filing jointly; qualified widow/er: $27,700

Head of household: $20,800

Before deciding to itemize, compare your anticipated deductions with the standard deduction to determine the most advantageous option. If your standard deduction is higher, it may be more beneficial to forego itemizing and take the standard deduction instead.

Recent Changes and FAQs: Navigating the Landscape of Charitable Tax Deductions

As the tax landscape evolves, it's essential to stay informed about recent changes and frequently asked questions regarding charitable tax deductions. Let's address some common queries:

  • Can non-itemizers deduct charitable contributions on their taxes?

No, non-itemizers cannot deduct charitable contributions on their taxes unless there are temporary tax laws in effect. In 2020 and 2021, non-itemizers were allowed to deduct up to $600 (married filing jointly) or $300 (all other filers) of qualified charitable cash contributions. However, this provision has since expired.

  • How much can you donate to charity for a tax deduction?

Generally, itemizers can deduct 20% to 60% of their adjusted gross income (AGI) for charitable donations. The exact percentage depends on the type of qualified contribution and the charity or organization. Contributions exceeding the limit may be deductible in future years.

  • How does your tax bracket impact deductions?

Your tax bracket is based on your taxable income and filing status. Each taxpayer belongs to multiple income tax brackets, but the term "tax bracket" refers to the top tax rate that applies to your income. Understanding your tax bracket helps determine the percentage of tax applied to your income. It's important to consult the current tax brackets for accurate calculations.

  • What is the Pease limitation, and how does it affect deductions?

The Pease limitation, formerly a reduction on itemized deductions for higher-income taxpayers, has been removed from the tax code since the Tax Cut and Jobs Act of 2017. This limitation reduced the value of itemized deductions by 3% of adjusted gross income (AGI) over a certain threshold.

  • Can you deduct private S-corp or C-corp stocks at fair market value?

Yes, it's possible to deduct the full fair market value of privately held S-corp or C-corp stocks if the recipient organization is a public charity. However, it's crucial to ensure that the charity can accept and liquidate these assets efficiently. Fidelity Charitable, for example, specializes in facilitating charitable donations of these types of assets.

Unlocking the Power of Tax-Free Wealth While Making an Impact

By understanding the intricacies of tax deductions and strategically planning your charitable contributions, you can unlock the power of tax-free wealth. Not only can you make a positive impact on the causes you care about, but you can also optimize your tax situation. Remember to document your donations, time your contributions wisely, and consider the impact of recent changes in tax laws. With careful planning and a tax strategist or CPA by your side, you can create a win-win situation – benefiting both society and your financial well-being. Start your journey towards tax-free wealth today and make a lasting difference in the world.

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