Consider these tax strategies for charitable donations

In 2017, Congress passed the Tax Cuts and Jobs Act, which, among many changes, both lowered tax rates and increased (doubled) the standard deduction. In fact, those who itemized deductions on their taxes went from 31% to about 14% (taxfoundation.org) due to the higher standard deduction ($12,950 for single filers, $25,900 married in 2022. )

While this change simplifies filing and reduces taxes for many filers, some charity-inclined individuals have found that they no longer receive a deduction for their charitable donations because they no longer itemize and take the standard deduction. higher. The good news for these filers, however, is that there are still ways to make charitable donations and reduce their taxes. One of these means is qualified charitable distribution, commonly referred to as “QCD”.

Are Qualified Charitable Distributions for you?

A qualified charitable distribution is an otherwise taxable distribution from an IRA (excluding an ongoing SEP or SIMPLE IRA) that is paid directly by the IRA to a qualified charity. The word “qualified” is important – you can’t just give the money to a friend or family member. The charity must be one that is approved by the IRS. Eligible charities include 501(c)(3) organizations and places of worship. Donor-advised funds are not eligible to receive QCD on a tax-advantaged basis.

QCDs offer several advantages – the first being a perfect place to apply your required minimum distributions.

The IRS requires taxpayers over the age of 72 (he was 70½, but increased to 72 in 2019) to withdraw a required minimum distribution from their IRA each year. This forced distribution is added to the taxable income that you must report on your annual return. But by using a QCD to donate that money to charity, you can reduce your tax liability. That’s because the amount donated to charity using a QCD counts toward your IRA’s annual RMD, but it doesn’t count against your annual taxable income.

Using QCDs, individual IRA owners can gift up to $100,000 each year. Couples filing jointly can offer up to $200,000. But remember, this option is only available to IRA owners over the age of 70.5. It cannot be used for 401(k)s, 403(b)s, savings plans or other plans.

Another important point to consider is that funds must be paid directly from the IRA to the charity. You cannot take possession of RMD funds and then write a check. (That said, some IRA administrators will mail you a check directly. But you can simply give that check to the charity, instead of depositing it yourself.)

When does that make sense?

It generally makes more sense to take a QCD when making the standard deduction. For those detailing, it often makes more sense to gift valued assets, as this will also help mitigate your capital gains taxes.

For those under 70 and a half, there is another option called “grouping”.

Bundling is the process of taking as many tax-deductible expenses as possible (such as charitable contributions and property tax) in a single tax year. The year you have grouped your deductions, you detail them on your taxes. The following year, you benefit from the flat-rate allowance.

This is to alternate the years in which you itemize your deductions. For example, a family can typically donate $10,000 to charity per year. If they band together, they can instead choose to donate $20,000 one year and then $0 the next.

How does grouping work?

For example, a married couple may have $30,000 in itemized deductions in a typical year (between charitable contributions, property taxes, etc.). And because their itemized deduction of $30,000 is higher than the standard deduction of $25,900, it makes sense to itemize their deductions.

But if the couple “bundled” two years of deductions into a single year, they would save about $5,698 in taxes (using a marginal tax rate of 22%). Indeed, their $30,000 in deductions each year ($60,000 total) turned into $85,900 total ($60,000 one year, $25,900 the next).

These two examples – QCD and clustering – are just two strategies (among others) to get the most out of charitable contributions. To see what might be right for you, contact your finance professional. If you do not have one, do not hesitate to contact our team.

Hunter Yarbrough, CPA, CFP, is Vice President and Financial Advisor at CapWealth. He is passionate about taking a holistic view of personal finances, including investments, taxes, retirement, education, estate planning and insurance. For more information about Hunter and CapWealth, visit capwealthgroup.com.

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