Making the Most of Your Charitable Giving
We are often asked about optimizing charitable tax deductions, including whether you can take charitable donations without itemizing. There are many strategies available to decrease your tax burden through making donations, including some new (temporary) opportunities provided by the CARES Act.
18 months ago, we shared ways you could maximize your support for non-profit organizations at the forefront of providing relief during the pandemic. This included the following CARES Act provisions to reward taxpayers donating to qualified charities:
- Up to $300 for individuals (or $600 for married couples filing joint returns in 2021) of cash contributions is allowed as an “above-the-line” tax deduction. This means that if you claim the standard deduction, you can still receive a tax benefit from charitable giving by reducing your adjusted gross income (AGI) by that amount.
- The 60% of AGI limit that normally applies to cash contributions for individuals who choose to itemize is waived. For those who itemize, you can deduct more (up to 100%!) of your charitable cash contributions.
When these provisions expire, however, other strategies are available to make the most of your charitable giving. For example, while standard deduction amounts for taxable incomes are quite high, you can optimize your deductions by “bunching” them. Bunching combines your allowance for two or more years into one allowing for a more substantial charitable contribution.
If you have had a particularly good year, you might also consider setting up a Donor-Advised Fund (DAF). This can accelerate your bunching strategy by maximizing your contributions against a high-earning year. These contributions can then be donated at a later date. In addition to donating cash to your DAF, you can also contribute stocks or non-publicly traded assets such as private business interests and cryptocurrency. You can support most IRS-qualified public charities with grant recommendations from your DAF. Even better, the fund can be invested and grow in value, making even more money available for you to support your favorite charitable causes.
However you choose to optimize your charitable giving, it is important to remember that your donations will only qualify for a tax deduction if they go to a tax-exempt organization, as defined by section 501(c)(3) of the Internal Revenue Code. Additionally, you should ask the charity how much of your contribution will be tax-deductible with proper documentation, as the value of any goods or services received for your donation, if any, may decrease the amount of the donation. Finally, to be sure of an organization’s tax-exempt status, you should either ask the charity or use the Tax-Exempt Organization Search tool provided by the IRS to verify an organization’s status.
Of course, it’s also important to keep track of all your tax-deductible donations, however small. This documentation can include, but is not limited to:
- bank statements
- credit card statements
- receipts from the charity
If you have set up donations via automatic deductions from your paycheck, you need to keep copies of your W-2 or pay stubs showing the amount and date of the donation. Additionally, any expenses—and in some cases, time—incurred while volunteering for a qualified organization can be tax-deductible too and needs to be documented.
As always, we are here to help you understand how you can make the most of your charitable contributions, now and for the future.
Stay Safe & Healthy,
The CJBS Team