Make the most of new rules for charitable giving

Most people no longer get a tax deduction when they donate to charity. That shouldn’t stop you from donating, but you might want to change your approach.

Generally, only taxpayers who itemize deductions can write off charitable contributions. Instead, the vast majority of taxpayers take the standard deduction, which was nearly doubled by the Tax Cuts and Jobs Act of 2017. (Temporary provisions in the pandemic relief legislation allow taxpayers to deduct $300 of their contributions in 2020 and 2021 without discrepancy, but those provisions have lapsed.)

It never made sense to donate just to get a deduction. If you’re in the 22% federal tax bracket, for example, you only save 22 cents in taxes on every dollar you give away. If you are charitable, however, there may still be ways to get a tax break for your generosity through planning, or you could rethink how you give money away.

DONOR ADVISED FUNDS ARE ONLY FOR THE RICH

Tax experts recommend taking “basis” deductions when people’s itemized deductions are close to the standard deduction limits, which in 2023 are $13,850 for single filers and $27,700 for married couples filing jointly. Budgeting allows taxpayers to take the standard deduction one year while moving as many itemized expenses as possible into another year. If you’re maximizing deductions for this year, for example, you could pay your mortgage payment from January 2023 in December or make two years’ worth of charitable donations.

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One way to take deductions is to use a donor-advised fund, an account that allows you to make a lump sum in one year and then distribute the money in the future to the charities of your choice, says financial adviser Mark Astrinos , a certified public accountant and personal finance specialist in the San Francisco Bay Area. Major investment companies as well as universities, community foundations and various charities offer donor-advised funds.

If the client typically gives about $5,000 a year to charity, Astrinos could encourage that person to give three years’ worth of donations, or $15,000, to a donor-advised fund. The donation would allow the client to exceed the standard deduction for a single filer and other expenses, such as mortgage interest and property taxes, may again be deductible.

GRANT STOCK MAY OFFER GREAT TAX BENEFITS

A stock that has risen in value since you bought it can create a big tax bill when you sell it. You can avoid that bill if you donate the stock to a qualified charity or donor-advised fund. If you can itemize deductions, you can also take a deduction for the current price of the stock on the day of your donation.

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Astrinos uses the example of someone who invested $10,000 in shares that are now worth $100,000. Selling the stock would create a $90,000 capital gain, and donating it would create a $100,000 deduction and avoid capital gains tax.

“It’s a double tax benefit,” says Astrinos.

THINK ABOUT YOUR IRA AFTER AGE 70

Qualified charitable distributions allow people 70½ and older to donate money directly from their individual retirement accounts, or IRAs, to charity. There is no tax deduction, but the money is not included in their income, either.

Qualified charitable distributions often appeal to people who are facing required minimum distributions from their retirement accounts but don’t need the income, Astrinos says. (The IRS requires people to withdraw minimum amounts from most retirement accounts — and pay taxes on that income — starting at age 72.)

CONSIDER THE GIFT EXEMPTION LIMITATIONS FOR DIRECT GIFTS

The IRS places other restrictions on charitable deductions, such as requiring the recipient to be a “recognized charity” — a tax-exempt organization listed by the IRS. Gifts to individuals and political organizations do not qualify.

If you’re not going to get a tax deduction for your generosity, you could expand the list of worthy causes you want to benefit from. You could contribute to a political cause, help reduce a friend’s student loan debt or pay someone’s rent if they are struggling. However, if you give money to an individual, you should understand the annual gift exemption limits. In 2023, you can give up to $17,000 to as many people as you want without filing a gift tax return. You would not owe any gift tax until the amount you gave over that annual limit exceeded the lifetime exemption, which in 2023 was $12.92 million. The $17,000 limit does not apply to gifts to spouses or political organizations or if you are paying someone else’s medical or tuition bills.

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Or you can continue to give to your favorite charities, and they may need your contribution more than ever. Charities are concerned that a rough stock market and high inflation could limit the giving of remaining donors.

“People are more generous when the weather is good, but people need more when the weather is not good,” points out Astrinos.

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This column was provided to The Associated Press by the personal finance site NerdWallet. The content is for educational and informational purposes and is not investment advice. Liz Weston is a columnist at NerdWallet, a certified financial planner and the author of “Your Credit Score.” Email: [email protected] Twitter: @lizweston.

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