Year-End Charitable Donation Checklist: Tax Deductions, Verifying Charities & More
December is here, the time for holiday parties, family gatherings and a toast to a new year to come. But before the year is over, you may be feeling called to give your money, property or even time to a qualified organization. Giving to causes we support not only enriches our communities but can also provide tax benefits if done in the proper manner.
Below are some topics and options to consider when making your year-end gifting decisions.
Topics to Consider
Should I itemize my deductions?
The first thing to consider will be if you are itemizing your deductions in 2023. The IRS has increased the standard deduction for the year to $13,850 for single filers, $27,700 for married filing jointly, and $20,800 for heads of household.
If your itemized deductions (unreimbursed medical/dental expenses in excess of AGI limits, state/local taxes, property taxes, mortgage interest and charitable contributions) do not exceed your applicable standard deduction threshold, you will default to the limits set above. It is best to consult with your CPA or financial advisor on how much you would need to give in qualified charitable contributions to exceed these standard deductions.
The next to consider is what type of donation you are making. For example, if you are making donations of cash to public charities and certain private foundations, your limit would be subject to 60% of your Adjusted Gross Income (AGI), whereas if you make a donation of appreciated assets (generally publicly traded stocks) the limit is subject to 30% of your AGI.
The Tax Exempt Organization Search can help you consider the different limitations each of these donations will be subject to.
It is essential to keep detailed records of all your charitable giving. These would include receipts, written acknowledgements from the organizations, and other communications. It is best to have at a minimum the name of the organization, the amount that you gave, and the date you contributed. The IRS has the ability to disallow any contributions of $250 or more if you lack the proper documentation.
Choosing a Charitable Organization
To ensure tax benefits, your donation should go to a verified 501(c)(3) organization in good standing with the IRS. You can use the IRS’s charity search tool or a charity navigator such as GuideStar to search for nonprofit organizations and confirm their tax exempt status and filings, such as their annual form 990 and other public information.
Ways to Give
Cash is probably the simplest way to make a donation. You can give online or by mailing a cash or check gift directly to the nonprofit organization you choose.
If your stocks have appreciated considerably since you purchased them, you may consider donating stock directly to a charity. This option has a couple of potential upsides:
Appreciated stock gifts are often greater than if you sell the stock then make a cash donation, because there is no capital gains tax on stock donated to charity. Additionally, a stock donation could be used to reduce investment concentrations when capital gains tax is a barrier to selling.
Qualified Charitable Distributions (QCD’s)
As discussed in our prior blog, 7 Financial Planning Strategies for Year End, there is a way for those 70 ½ or older to give to charities from your IRA. Distributions from an IRA are typically taxed at ordinary income tax rates. However, if you are able to gift from your IRA directly to a qualified charitable organization, these distributions would be excluded from your taxable income. This is especially advantageous for those who are currently taking required minimum distributions (RMD).
The exclusion of your taxable IRA distribution can often be more effective than taking a charitable deduction for the contribution. QCDs are limited to $100,000 or less annually.
Donor Advised Fund (DAF)
Our final topic for consideration would be a Donor Advised Fund. A Donor Advised Fund is a charitable investment account for the sole purpose of supporting a charitable organization. This strategy can be a good solution for individuals who have not yet identified a particular organization that they would like to gift to.
By setting up a Donor Advised Fund, you can make a contribution and receive the tax deduction for the full amount in the same year. You can then identify the organization(s) and amount of distribution at a later date.
Understand Your Options
Knowing what charitable giving strategy is best for you is a matter of trust. That’s our name. Please consult with one of our relationship managers if you have questions about year-end charitable contributions or if you want to begin talking about a strategy for 2024. Connect with us when you're ready.
This material is for informational purposes only. First Financial Trust does not provide tax or legal advice. The content herein is not a substitute for professional advice, and customers are encouraged to consult with qualified tax and legal professionals regarding specific situations.
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