Charities Benefit First (and You Get a Break in Your Taxes)
The question for today, is: how do everyday taxpayers, who are unable to itemize, maximize the impact of their charitable donations?
Section 170 of the Internal Revenue Code (IRC) states that “There shall be allowed as a deduction any charitable contribution ( as defined in subsection (c ) ) payment of which is made in the taxable year.” While that’s what the tax law says, the reality is that since 2018, more people have been using the standard deduction and do not qualify for itemization when preparing their annual tax returns.
The first thing you can do right now is to assess whether you will be using the standard deduction, or itemizing on your 2023 tax return. The standard deduction for tax year 2023 if you are single is $13,850. It is $27,200 if you are married filing jointly, and $20,800 if your filing status will be head of household. If your charitable contributions will not allow you to exceed those limits, and therefore itemize then you should consider the following options to help make your contributions become tax beneficial to you.
Donate Appreciated Assets
The most popular or commonly appreciated asset donated is stock. If you’ve experienced gains in the market this year, a wise choice would be to contribute a portion of your profitable investments to support your preferred church or charitable organization. The benefit is that you can deduct the stock’s appreciated value, avoid any capital gains earned from the stock, and keep cash in your pocket.
You must have held the stock for at least one year to qualify for this benefit. Some suggest that you may need to donate $1,000 in stock equivalent value given the process. However, everyone can benefit, whether or not they itemize.
The simplest method to execute this transaction is to find out whether your charitable organization accepts appreciated assets and whether they have a brokerage account. Some organizations have this information listed on their website. For example, the Red Cross has a stock donation transfer page with information such as their brokerage account number, address, and additional information. You can then share this information with your investment company. Remember this must occur no later than December 31, 2023, and brokerage firms are busy executing these transactions on behalf of their clients.
Retirement Funds Transfers
If you are 70½ you can donate to your favorite charity or church even though you do not itemize on your tax return. Instead of taking money out of your account and having to pay taxes on that income under the Required Minimum Distribution (RMD) laws, you can simply transfer the money to a charitable organization and avoid having more income tax. Remember this money has been sitting in your account tax-free, collected from your salary or compensation, pre-tax — all while earning interest.
While many people may not have reached the age of retirement to qualify for this charitable option, let me share with you a few options under which you can withdraw money from your 401(k) plan without incurring the early withdrawal penalty of 10%. If you have a child born this year, you could withdraw from your retirement account without paying any penalties. Also, you can deduct $1,000 per year from your retirement for personal or family emergency expenses. Finally, if you are the victim of domestic abuse by a spouse, you may qualify for early withdrawal of retirement funds without incurring any tax penalty.
Donor Advised Funds ( Itemization)
Finally, if you want to itemize, establish a Donor Advised Fund (DAF). This area of tax can be complicated, but you can think of it in the same way as “bundling services” just as you may have your cable, internet, and telephone services all with one company. With DAF, the idea is to make a large contribution in one year and smaller contributions, if any, in subsequent years. The advantage of these accounts is that you do not have to distribute the funds to any charitable organization immediately or at the time the fund is established. The funds can be allocated to several charities over several years. This strategy is mostly used by those who itemize or may want to make a large contribution in one year.
Since changes in the tax law and the new rules, tax deductions have become less of an incentive for people to make a charitable contribution each year. But should tax benefits be driving the purpose of our giving? I want to encourage you to allow your benevolence, especially during this holiday season, to be driven and directed by your concerns for the plight of the least, the lost, and the left behind instead of tax policy.
THAT’S WHAT’S UP!
Before you donate, you should check out the organization. You can do so by visiting Give.org or charitynavigator.org. You should also check with the IRS charities and nonprofit sector to verify their tax-exempt status. While many exempt organizations are doing exceptional work, many scams and fraudulent actors are operating in this arena. That’s what’s up!
Ruthven R. Phillip, Esq., is a tax attorney, Stewardship and Philanthropy Ministry Assistant, and CEO of Give2Getrich, LLC. Give2Get Rich, LLC 2023. All Rights Reserved. Any distribution or reproduction of part or all of the contents in any form is prohibited.