Making charitable gifts is smart for several reasons. First, you are doing good with your donations by supporting nonprofit causes important to you or providing help for those who are less fortunate. Second, charitable contributions are tax deductible for individuals and businesses. Now that the end of the year is almost here, it’s a good time to make some last-minute donations to reduce your taxable income.
The first thing to understand is that you must itemize the deductions on your tax return in order to claim 100% of any large charitable contributions. This is important if you are giving a significant amount to charity each year. Otherwise, the IRS is allowing for a special tax deduction of up to $300 per individual (or $600 for married couples filing jointly), even if you file using the standard deduction.
Most Americans now file with the standard deduction because it is easier and the total deduction amount is higher for a majority of taxpayers compared to what they would get through itemizing. This is thanks to the Tax Cuts and Jobs Act (TCJA) of 2017. The IRS certainly prefers the standard deduction, as well, as it is less work for them. Unfortunately, the standard deduction normally wouldn’t allow for charitable contribution deductions. This year, however, they are allowing the claim ($300 individual/$600 married) because of the pandemic. So many people have been devastated by the virus. It’s a way to encourage some tax-advantaged giving.
In 2020, this same tax rule was introduced to help encourage giving during the pandemic crisis. However, the deductible limit was only $300 for both individuals and couples filing jointly. This year, they raised the bar a little more with the $600 limit for those who are filing jointly. Every little bit makes a difference!
If you are giving larger amounts of cash, appreciated stocks, depreciated assets, real property or any other type of tax-deductible charitable contributions, then you will want to itemize your tax return. This is the only way to deduct the full value of the donation if it exceeds those standard deduction limits.
Making charitable gifts during the holiday season is common. More money is raised for charity in December than any other time of year. This is a combination of increased philanthropic efforts and also those looking to maximize their year-end tax deductions. Individuals, couples and business owners will all benefit from significant charitable contributions if they are able to reduce their taxable incomes.
If you do claim the standard deduction and exceed the $300/$600 limits, don’t be discouraged. There is no point in itemizing unless you know your total itemized deductions will exceed the standard deduction amount. Just remember you are doing good. That’s why a lot of Americans paid forward their stimulus payments because they didn’t necessarily need the money. They simply donated it to those who needed it more.
December is the season for tax-efficient charitable gifting. If you have questions about how to maximize your donation strategy and improve your tax plan, contact Illumination Wealth today. Let our advisors help you manage your wealth and make smart financial decisions.