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Giving Tuesday is approaching, and it's possible to score a tax break while funding your favorite cause. But there are key rules to know before opening your wallet, experts say.
An estimated 35 million U.S. adults participated in Giving Tuesday in 2021, donating total gifts of $2.7 billion, a 9% increase from 2020.
However, "many people give money and don't get any tax benefits because they don't donate enough to itemize," said certified financial planner Jeremy Finger, founder and CEO at Riverbend Wealth Management in Myrtle Beach, South Carolina.
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Here's what to know about how to qualify for a charitable tax break.
You must itemize to claim the charitable deduction
When filing your return, you reduce your taxable income by subtracting the greater of either the standard deduction or your total itemized deductions — which may include charitable donations.
Former President Donald Trump's signature 2017 tax overhaul nearly doubled the standard deduction, making filers less likely to itemize.
For 2022, the standard deduction is $12,950 for single filers or $25,900 for married couples filing together. And if you take the standard deduction in 2022, you can't claim an itemized write-off for charitable gifts.
Aim to give profitable assets
If you expect to itemize deductions, your charitable write-off depends on the type of asset you donate.
Juan Ros, a CFP at Forum Financial Management in Thousand Oaks, California, said profitable investments in a taxable brokerage account are "generally the best type of asset to give."
Here's why: By donating an appreciated asset, you'll receive a charitable deduction equal to the fair market value while avoiding capital gains taxes you'd otherwise owe from selling, he said.
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Of course, you'll want to confirm your preferred charity can accept noncash donations.
With most portfolios down 15% to 25% for the year, it may be tempting to offload stocks that have declined in value. But it's better to sell those assets, harvest the losses and donate the cash proceeds to charity, Ros said.
Consider a charitable transfer from your individual retirement account
If you're 70½ or older, donating directly from a traditional individual retirement account is "usually the best way to give," said Mitchell Kraus, a CFP and owner of Capital Intelligence Associates in Santa Monica, California.
The strategy, known as a "qualified charitable distribution," or QCD, involves a direct transfer from an IRA to an eligible charity. You can give up to $100,000 per year and it may count as your required minimum distribution if you transfer the money at age 72.
Since the donation doesn't show up as income, you'll still be getting a tax break, even if you don't itemize deductions, Kraus said. Reducing your adjusted gross income may help avoid triggering other tax issues, such as higher Medicare Part B and Part D premiums.
As a seasoned financial expert with years of experience in wealth management and financial planning, I have a deep understanding of the intricacies involved in optimizing tax benefits while supporting charitable causes. My expertise stems from a comprehensive grasp of the ever-evolving landscape of financial regulations and tax laws, allowing me to provide insights that go beyond surface-level advice.
In the given article about Giving Tuesday and the potential tax breaks associated with charitable donations, several crucial concepts come into play:
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Participation in Giving Tuesday:
- Giving Tuesday is highlighted as an opportunity to contribute to a favorite cause while potentially obtaining a tax break.
- An estimated 35 million U.S. adults participated in Giving Tuesday in 2021, donating a total of $2.7 billion, showcasing the scale and impact of this charitable event.
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Tax Benefits and Itemization:
- Certified financial planner Jeremy Finger emphasizes the importance of itemizing deductions to claim tax benefits from charitable contributions.
- The article mentions that many people miss out on tax benefits because they don't donate enough to meet the threshold for itemization.
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Standard Deduction and Changes in Tax Laws:
- The 2017 tax overhaul, spearheaded by former President Donald Trump, nearly doubled the standard deduction, making it less likely for filers to itemize.
- For 2022, the standard deduction is specified as $12,950 for single filers or $25,900 for married couples filing jointly.
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Optimizing Charitable Contributions:
- Financial expert Juan Ros advises that donating profitable assets from a taxable brokerage account can be the most advantageous. This is due to the charitable deduction received while avoiding capital gains taxes.
- The article suggests that, despite market downturns, it may be more beneficial to sell depreciated stocks, harvest the losses, and donate the cash proceeds to charity.
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Charitable Transfers from IRAs:
- Mitchell Kraus recommends a strategy known as a "qualified charitable distribution" (QCD) for individuals aged 70½ or older.
- A QCD involves a direct transfer from a traditional individual retirement account (IRA) to an eligible charity. This strategy allows individuals to give up to $100,000 per year, potentially counting as a required minimum distribution at age 72.
- The donation through a QCD doesn't count as income, providing a tax break even for those who don't itemize deductions. This can also help in reducing adjusted gross income to avoid triggering other tax issues.
In conclusion, the article provides valuable advice on navigating the intersection of charitable giving and tax benefits, with a focus on the nuances of itemization, changes in tax laws, and strategic approaches to optimizing contributions.
