While making a charitable contribution is relatively simple, a few additional precautions can help maximize tax benefits, and ensure they truly benefit the causes you care about.
Contributions made to qualified charitable organizations can be deducted if you itemize deductions on your tax return. Itemized deductions include amounts paid for charitable contributions, medical expenses, state and local taxes, mortgage interest, and casualty losses. For this to be a meaningful exercise, your itemized deductions must exceed your standard deduction. For 2019, the basic standard deduction is $12,200 for single filers and married couples who file separately, $18,350 for heads of household, and $24,400 for joint filers. Taxpayers 65 years or older, or blind, can claim an additional deduction of $1,300 if married, or $1,650 if single.
To maximize the tax benefit received from donations, consider donating stocks & mutual funds which have escalated in value since their purchase. Payment of tax on their capital gains can be avoided if you have owned them for over a year, and they were held in a taxable account. If you donate stock with a current market value of $12,000 originally purchased over a year ago for $4,000, you avoid tax payment on the $8,000 capital gain. If you go ahead and buy $12,000 of the same stock to replace the donated shares, the potential increase in price over $12,000 is alone taxable.
If you are 70 ½ years or older, you can make tax-free charitable contributions of up to $100,000 a year from your IRA to qualified charitable organizations. These contribute towards traditional IRA’s required minimum distribution (RMD) for the year, but are not added to the taxable income as RMDs usually are, and so escape taxation.
Tax deductions reduce the amount of income you are taxed on. For example, a $10,000 deduction for charitable contributions will generally reduce taxable income by $10,000. This will result in a $3,700 increase in federal income tax for a person in the 37% tax bracket, $3,500 for someone in the 35% tax bracket, $3,200 for someone in the 32% tax bracket, and so on. The higher your tax bracket, the greater your potential tax savings.
Be sure about the causes you would like to support, the amount you are likely to contribute towards them, and mode of contribution (cash or appreciated assets). Research the charities and organizations you wish to support, and make informed decisions about specific charities. Be wary of charity scams and avoid fraud to ensure your donations support the actual charities you want to support.
Please consult your financial advisor for additional information and advice before making a significant charitable gift.
