Time is running out to make charitable contributions for 2022!
Whether or not any individual donor can take a tax deduction or otherwise reduce their tax liability by making charitable contributions is based on that donor’s specific tax situation. Factors such as age, types of retirement accounts owned, ability to itemize rather than take the standard deduction, total adjusted gross income relative to the amount of donations made in a given tax year, and other factors may come into play.
The giving tips provided in this article are intended to provide a starting point for understanding some of the options that may be available to you and should not be construed as individual tax advice. Please contact the IRS or your accountant or tax advisor directly for tax guidance specific to your situation.
Eligible Nonprofits
If you are eligible to take a tax deduction or otherwise reduce your tax liability for your charitable contributions, be sure to direct them to charities that have the tax status to accept them since minimizing your taxes frees up more funds for you to donate. Generally, nonprofits in good standing with the IRS that are organized as 501(c)(3) public charities under the tax code will state that your “donation is tax deductible as permitted by law,” or something similar. Confirm this directly by using the IRS’s online tool. Donations to other types of nonprofits, such as 501(c)(4) social welfare organizations, are generally not tax-deductible.
Visit CharityWatch’s list of Top-Rated charities to identify a financially efficient nonprofit to support that also meets our benchmarks for governance and transparency. View the tax status in the Rating & Metrics section of each charity’s profile page to understand which organizations are 501(c)(3) public charities.
We hope you will also consider supporting CharityWatch when making your year-end giving decisions so that we can continue 30 more years of keeping charities honest.
Satisfy Your IRA Required Minimum Distribution (RMD) Using a Qualified Charitable Distribution
Individuals 70 ½ or older can direct up to $100,000 per year from their traditional IRAs to operating charities by making qualified charitable distributions, and this is true for those who itemize as well as for those who take the standard deduction. All or part of the donor’s qualified minimum distribution for 2022 can be satisfied with qualified charitable distributions which are not considered taxable income for the donor. Those who are married and filing jointly each qualify for an annual qualified charitable distribution of up to $100,000.
Itemize to Claim Charitable Deductions
Taxpayers reduce their taxable income by determining whether subtracting itemized expenses or taking the standard deduction will yield the lowest final figure. If you take the standard deduction to reduce your taxable income in 2022, you can’t claim an itemized deduction for charitable donations.
After The Tax Cuts and Jobs Act passed in late 2017, nearly doubling the standard deduction, the number of itemizers fell from nearly 25% of all U.S. taxpayers in 2017 to less than 10% the following year.
The standard deduction for single filers and married couples filing jointly in 2022 is $12,950 and $25,900, respectively.
Tax Deduction Limits
Tax year 2022 deduction limits are:
30% of adjusted gross income (AGI) for contributions of noncash assets, if the assets were held for more than one year.
60% of AGI for contributions of cash.
Contributions in excess of these deduction limits may be carried forward for up to five subsequent tax years.
Offsetting Tax Liabilities
If you are over the age of 59 ½ you may be able to offset some tax liability on standard withdrawals from certain retirement accounts, such as traditional IRAs, by making charitable contributions—and do so without incurring early withdrawal penalties.
According to Schwab Charitable, “Donors with tax-deferred retirement accounts, such as traditional IRAs, can use charitable deductions to help offset the tax liability on the amount withdrawn and converted to a Roth IRA. The primary benefits of a Roth IRA are tax-free growth, tax-free withdrawals (if holding period and age requirements are met), no annual RMD [required minimum distribution], and elimination of tax liability for beneficiaries (depending on the timing).”
Donor-Advised Funds
With a donor-advised fund (DAF) a donor can contribute cash, appreciated assets, or investments into an account, invest, and recommend grants to qualified U.S. public charities. Popular DAFs include community foundations, the National Philanthropic Trust, Schwab Charitable, Fidelity Charitable, and Vanguard Charitable.
Read the National Philanthropic Trust’s 2022 Donor-Advised Fund Report for more information about the growing popularity of DAFs.
Donate Appreciated Non-Cash Assets
One effective giving strategy that can maximize charitable impact while minimizing tax liability is donating appreciated non-cash assets. The long-term capital gains taxes a taxpayer would have incurred (typically ranging from 15%-20%) had they sold the assets first and donated the proceeds, can generally be reduced or eliminated. One important caveat—the appreciated non-cash asset must have been held for longer than one year.
It is important to understand how to value donated assets for tax purposes. Refer to IRS Publication 561, Determining the Value of Donated Property.
Donate Cash Proceeds from Depreciated Securities
If you are holding securities that are currently valued at less than their original cost (cost basis), and sell them at a loss, you may be able to use such capital losses to offset capital gains and up to $3,000 of ordinary income. You can then claim a charitable deduction if you donate cash from the sales proceeds.
Conclusion
Many generous people regularly donate to the causes they believe in irrespective of any potential tax benefits. Take advantage of tax deductions if you can and give generously if you are able. Follow CharityWatch’s 5 Steps for Informed Giving for help with narrowing down which charities are most worthy of your donations. And don’t forget to also be generous of spirit when making your giving decisions. Thank you for giving wisely!
