To claim a deduction for charitable contributions, you must itemize your deductions on Schedule A of Form 1040. This means you forgo the standard deduction, so ensure that your itemized deductions (which includes more than just charitable contributions) exceed the standard deduction amount for your filing status. This is where "bunching" might make more sense; we'll get to it later on in the article.
For a donation to be deductible, it must be made to a qualified charitable organization. The IRS provides a searchable online tool, the Tax Exempt Organization Search, where you can check the status of an organization. Contributions to individuals, political organizations, and candidates are not deductible.
The IRS imposes limits on how much you can deduct in charitable contributions based on your adjusted gross income (AGI - find out more about AGI here). For cash donations to public charities, the limit is 60% of AGI. However, for donations of appreciated assets like stocks, the limit is 30% of AGI. It's essential to be aware of these limits to plan your contributions accordingly.
Maintaining thorough documentation of your charitable contributions is crucial. For any cash contribution, you need a bank record (like a canceled check) or a written communication from the charity that indicates the date, amount, and name of the organization. For non-cash donations over $500, you'll need to complete Form 8283 and attach it to your return. If your non-cash donation exceeds $5,000, you might also need a qualified appraisal.
If you have stocks or other investments that have increased in value, consider donating them directly to a charity. This strategy allows you to avoid paying capital gains tax on the appreciation, and you can still claim the full fair market value as a charitable deduction.
A donor-advised fund (DAF) is a charitable investment account. You can contribute cash, stocks, or other assets to the DAF and receive an immediate tax deduction. Over time, you can recommend how the funds are distributed to charities. It's a way to centralize and manage your charitable giving while optimizing tax benefits.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, introduced in 2020, included provisions that enhanced tax incentives for charitable giving. For example, taxpayers who take the standard deduction can also claim a $300 ($600 for married couples filing jointly) above-the-line deduction for cash contributions to qualifying charities. It's worth checking if these provisions have been extended or modified in subsequent years.
If you're over 70½ years old and have an Individual Retirement Account (IRA), consider making a qualified charitable distribution (QCD). A QCD allows you to donate up to $100,000 directly from your IRA to a qualified charity. The distribution is not included in your taxable income and satisfies your required minimum distribution.
Another strategy is to "bunch" multiple years' worth of charitable contributions into a single year. This tactic can be especially beneficial if you're close to the threshold where itemizing makes sense. By bunching donations, you might exceed the standard deduction in one year and then take the standard deduction in subsequent years.
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***Disclaimer: This article is for informational purposes and is not meant to be financial or legal advice***