#147 - Seven Ways Charity Can Give You a Tax Benefit
While I don’t believe the purpose of charity is to receive a tax benefit, they are linked in many instances. Below are several ways this could play out for the everyday American.
In 2020 and 2021, you did not have to itemize your deductions to receive a small benefit from a charitable contribution. As of now, this has not been extended to 2022. Therefore federal charitable deductions come into play primarily if someone is itemizing (more itemized deductions than the standard deduction). If you are itemizing deductions, a $100 charitable contribution likely saves you about the percentage of your tax bracket. For example, if you are in the 22% bracket it would save you about $22 in taxes. Admittedly it is not as simple as just looking at your tax bracket to see how much you would save but in many instances this will be true.
Even if you are not itemizing deductions from a Federal standpoint, you may receive a State charitable deduction/credit.
If you are not itemizing deductions in any given year (or even sometimes when you are), depending on the amounts of your charitable contributions and other deductions it can occasionally make sense to give multiple years of charitable contributions in a single year if combining multiple years into one causes you to itemize. Many people use a Donor Advised Fund when putting this strategy in play.
People are not in the same tax bracket throughout their life. Being aware of these changes can allow you to give more tax efficiently. For example, if you will itemize deductions in both 2022 and 2023 but your income will drop dramatically in 2023 it could make sense to pull forward some or all of your future giving into this year.
It is possible to give long-term appreciated securities. If done correctly, you get a charitable contribution for the value of the gift and don’t pay tax on the unrealized gain.
Qualified Charitable Distributions can be taken from a Traditional IRA once someone turns age 70.5. These distributions are not reported in income and notably, they can satisfy the Required Minimum Distribution requirement if done correctly. There are several steps to make sure this is done correctly.
Many states have special tax credits for charitable contributions. For example, Indiana has a limited partial tax credit for gifts to a Scholarship Granting Organization. It is through this tax credit (and the credit for contributing to an IN 529) that my wife and I reduce our state income tax bill to zero (we still pay county tax).
I am not aware of a place where making a charitable contribution doesn't decrease your overall net assets (though it could exist). Therefore, I am not proposing doing it for the financial benefit. That said, being aware of the laws can allow you to make the charitable contributions you are doing more tax efficient.
Having earned income is one of the requirements to make an IRA contribution. Individuals can use their spouse's income to satisfy this requirement.
Thank you for reading!