How do charitable donations affect taxes?
Each year, Americans give several hundred billion dollars to charitable organizations. Many donors have a strong desire to support causes important to them, but they’re also curious how charitable giving affects taxes. Read on to learn more about the tax benefits of charitable donations:
Why is tax planning for charitable giving important?
Gifts to 501(c)(3) charitable organizations are eligible for tax deductions, but whether an individual will receive a benefit from those deductions depends on their specific situation and whether they itemize deductions. A taxpayer will receive a tax benefit if they have more itemized deductions than the standard deduction ($12,950 single/$25,900 married in 2022). Itemized deductions include charitable contributions, mortgage interest, state/local and property taxes up to $10,000, and medical expenses exceeding 7.5% of income.
If a taxpayer doesn’t itemize deductions, they don’t receive a tax benefit for their charitable donations. For example, if a couple has $10,000 of state taxes, $6,000 of mortgage interest, and $8,000 of charitable gifts, their deductions total $24,000. Since this is lower than the standard deduction, they won’t receive a tax benefit for their charitable donations.
What are the tax benefits of charitable donations?
There are a few tax planning strategies to increase the tax benefit of charitable gifts. The couple in this example could benefit from tax planning utilizing a donor-advised fund (DAF). Gifts to a DAF are tax-deductible in the year given to the fund, but the money can be distributed to specific charities over time. The couple could frontload two or more years of charitable gifts to itemize their deductions this year and receive the tax benefit. Then they could direct the funds to be disbursed to charities over the next few years so the charities could continue receiving funds each year rather than as a lump sum.
Also, those 70½ or older can make qualified charitable distributions (QCDs) using pre-tax dollars from an IRA. This provides both a federal and state tax benefit regardless of itemizing deductions. Some states offer tax benefits for charitable gifts.
These are just two examples of how charitable donations affect taxes.
Ultimately, the tax benefits of charitable donations are specific to each individual’s unique situation. If you’re interested in learning more about the strategies mentioned here and if they may benefit you, Foster & Motley can help advise and implement charitable giving plans. Contact one of our advisors today to learn more.