2023 Q1 In Review - Integrity Wealth Advisors, Ventura & Ojai, California

HOW DOES DONATING TO CHARITY REDUCE TAXES?
Making charitable donations allows you to do good
and get a valuable tax deduction. However, it’s
not always quite as simple as “donate $x, get a $x
tax deduction.” But when you support charitable
organizations, you’ll usually see a tax benefit. As long
as you follow the rules, that is. Here’s what to know.
WHICH DONATIONS CAN YOU DEDUCT?
Deductible charitable donations aren’t limited to cash.
You can also donate assets – anything from used
baby clothes to artwork to cars. Plus, your out-ofpocket
expenses may also be deductible when you
volunteer to do charitable work. The rules are slightly
different for asset and volunteer donations, so follow
them to get your full allowable deduction.
For asset donations, follow these guidelines:
» Determine the fair market value. That’s the amount
you could reasonably sell donations for on the
date of donation
» Make sure that donated household items are in
good used condition or better before taking the
deduction.
» Get a formal, signed appraisal if your donating
asset is worth $5,000 or more. You can find more
details in IRS Publication 561.
With volunteer-related deductions, you can include
unreimbursed expenses you paid but not your time or
the value of your service. You can deduct things like
travel expenses when volunteering away from home,
snacks you provided during an event, and the cost of
uniforms you must wear.
If you use your car while volunteering, you can deduct
directly related expenses – such as gas – or use the
14 cents per mile mileage deduction. Make sure you
save any relevant receipts and get documentation
from the charity you’re volunteering for, which is
required for deductions of $250 or more.
Here are four essential things to keep in mind:
1 Make sure the charities you’ve donated to are
IRS-qualified before taking any deductions. You
can visit the IRS website to determine whether the
organizations you support qualify.
2 Know the deduction limits. For the tax year 2022,
the deduction for cash donations is typically
limited to up to 50% of your AGI, though in some
circumstances, the limit may be reduced. You can
also deduct non-cash donations of up to 30% of
your AGI if you’ve held those assets for at least
one year. If your donations exceed these limits,
you can carry the deductions forward on your tax
returns for five years.
3 Keep records of your cash donations. For
donations of $250 or more, get a written receipt
from the charity explicitly stating the amount of
your cash gift or a description of the property
donated. That acknowledgment must also include
the value of any goods or services you received
from the charity.
4 Submit the proper forms when needed. Donating
property worth at least $500 must include IRS
Form 8283 as part of your tax return. If necessary,
attach any appraisals related to the donations.
You’ll have to itemize to get the deduction.
Unlike last year, you’ll need to itemize deductions on
Schedule A to include your donations on your tax
return in the upcoming tax season. And with the high
standard deduction amounts for the tax year 2022,
many people won’t end up itemizing. Those standard
deductions, based on your filing status, are:
- Single: $12,950
- Married filing jointly: $25,900
- Head of household: $19,400
If your itemized deductions fall short of the standard
deduction, you can use a bunching strategy to push
them over the line. That means fast-forwarding
payments to 2022 that you would have typically made
in 2023. That way, you can itemize for the 2022 tax
year and take the high standard deduction for 2023.
Here’s what that looks like:
Say you usually donate $5,000 every year to charity.
In 2022 you’d donate $10,000: this year’s and next
year’s donations combined. That double donation
pushes your itemized deductions over the standard
deduction for this year for a bigger reduction to your
taxable income.
CHARITABLE GIVING STRATEGIES THAT MAXIMIZE
TAX SAVINGS
Depending on your situation, you may be able to use
advanced strategies for bigger tax savings. Make sure
to consult your tax preparer before making any of
these more complex moves.
USING A DONOR-ADVISED FUND (DAF). These funds
can work especially well combined with the bunching
strategy. With a DAF, you make a tax-deductible
contribution in one year to maximize your itemized
deductions for that tax year. You can distribute the
money in the DAF to various charities over the next
few years as you would normally. You only get a tax
deduction when you fund the DAF, not when the DAF
distributes the money to organizations.
DONATE APPRECIATED ASSETS. You get two extra
benefits when you directly donate appreciated
assets. You avoid paying the capital gains taxes that
would apply if you sold the asset. And you still get a
charitable donation deduction to reduce your tax bill.
MAKE A QUALIFIED CHARITABLE DISTRIBUTION. If
you’re at least age 70 1/2, you can make a qualified
charitable distribution (QCD) of up to $100,000
directly from your traditional IRA to the charity of your
choice. These donations won’t be deductible, but
you’ll still get a tax benefit. They count toward your
required minimum distributions (RMDs) but won’t
increase your taxable income like regular RMDs.
Reduced taxable income means a lower tax bill, which
may help you avoid paying taxes on Social Security
benefits.
BOTTOM LINE
There’s more to the charitable donation deduction
than simply getting a dollar-for-dollar reduction
of your adjusted gross income. The rules can get
complicated, so consult your tax professional to
ensure you get it right.