Two of the ‘best’ ways to donate to maximize your tax deduction for charitable gifts, according to financial advisors
By Kate Dore, CFP
This holiday season, it may be possible to lower your taxes while supporting your favorite charity, experts say.
Despite the shaky economy, most Americans plan to donate similar amounts this year as they did last year, a recent Edward Jones study found.
While tax breaks typically aren’t the main reason for giving, experts say some donors may be missing out on the chance for a deduction.
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“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.
Here’s what to know about the charitable deduction before opening your wallet, and two of the “best” ways to give, according to financial advisors.
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.
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.
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.
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.