Don't Mess With Taxes

In addition to donating cash to your favorite charity, there are other ways to give. Here are three alternative charitable giving options. (Photo by Mark John Hilario)

🦃 Happy 🍗 Thanksgiving! 🦃

    
Millions of Americans gather today with family and friends to give thanks for all the good things in their lives.

This November holiday also is a major fundraising time for charities. Donations to nonprofits that help those in need — shelters, food banks and other meal programs, support services for those needing special services — increase this time of year.

Technically, these donations could provide donors a tax deduction if they itemize when they file their federal tax returns. But the number of taxpayers claiming deductions on Schedule A has dropped dramatically since the Tax Cuts and Jobs Act (TCJA) of 2017 essentially doubled the standard deduction amounts.

Before the TCJA provisions took effect in 2018, around 30 percent of taxpayers, mostly those with higher incomes, chose to itemize, according to the Tax Policy Center Briefing Book. By tax year 2020, just 10 percent of taxpayers chose to itemize, notes the Washington, D.C.-based nonpartisan, and nonprofit, policy research organization.

Many of those who donate, even if they don’t get any tax benefit from their gifts, contribute cash. In the tax world, cash doesn’t necessarily mean just currency. It also covers donations made by check, credit card, or digital transactions.

But there are other ways to give to your favorite charity, like the three alternative opportunities discussed below. This total of four donation options is fitting for today's fourth Tax Turkey to Avoid, overlooking noncash ways to donate.

Household goods and clothing: This is a common donation option. Almost everyone has at one time dropped off at Goodwill, the Salvation Armey, or our church’s thrift shop apparel and household items we no long need.

If you do itemize, the fair market value of the donated goods, which must be in good or better shape, counts as the amount you can claim as a tax deduction.

My post from March has more on property donation valuation guidelines.

Appreciated assets: If you're reviewing your investment portfolio, you might want to consider a charitable way to rebalance your holdings. Donating appreciated assets that you've had for a while can benefit you and your favorite charity.

There are two things to note.

First, you must donate stock or other assets that have increased in value.

Second, that appreciated value is from property that you’ve held for more than one year, making it a long-term capital asset.

Generally, when you donate appreciated property you’ve owned for more than a year, you can deduct the fair market value on your taxes and avoid paying any capital gains tax on the asset’s unrealized profit.

Here’s a quick, simplified example. You have a stock you bought two years ago for a total $1,000. Now it worth $2,000. If you sold the stock yourself, you'd owe capital gains tax on the $1,000 profit at either the 15 percent or, if you're a higher-income earner, 20 percent capital gains tax rate.

If you wanted to give your favorite charity the asset’s full worth as a charitable gift, you’d have to make up the $150 (for 15 percent capital gains taxpayers) or $200 (for those in the 20 percent rate bracket) in taxes you’ll owe out of your own pocket.

But if you gave the asset itself, the charity is in charge. It could hold on to the asset and sell it later when if might have more need for the money. Or it could sell it immediately and put  the current two grand to work now.

You’d still get credit for and satisfaction of giving a nice gift to your chosen charity. Plus, you wouldn’t owe Uncle Sam a cent in capital gains tax.

Again, my appreciated asset contribution example is very basic, and sometimes this type of donation can be complicated. So talk with your broker and financial/tax adviser before making any such donations.

Qualified charitable distribution (QCD): Older philanthropists have another option, a Qualified Charitable Distribution (QCD) from a traditional IRA that eventually will be subject to required minimum distributions (RMDs).

RMDs are mandated amounts that owners of this tax-deferred retirement account must withdraw each year once they reach age 73. But if you’re facing an RMD, which is due by Dec. 31 each year (after the initial mandated withdrawal, which can be pushed to April 1), and you don't need the required amount to cover your retirement expenses, consider the QCD option.

The important thing with a QCD is that you complete it correctly. The donated RMD funds must be a from your IRA. This is accomplished by your retirement account trustee directly issuing the RMD amount as a QCD to the charity, either electronically or by check payable to your chosen nonprofit.

The amount you can give as a QCD is adjusted each year for inflation. For the 2024 tax year, the maximum direct donation amount is a maximum $105,000. It goes to $108,000 in 2025.

Married couples who file jointly can get double the donation. If each spouse has an RMD-affected IRA, the QCD limit applies to each spouse.

While a QCD won't get you an itemized charitable gift tax deduction, the donated retirement account amount counts toward satisfying your annual RMD. That means your generosity meets Uncle Sam's retirement withdrawal rule while simultaneously keeping the directly donated amount out of your taxable income tally at tax filing time.

Also note that you don’t have to wait until you’re facing RMDs. The QCD option is available to traditional IRA owners who are age 70½ or older. This could help you reduce your IRA before you must take the required distributions, lowering the mandated amount you’ll eventually be required to withdraw when you’re older.

Donation limits, timing: Congress realized that the TCJA’s increased standard deductions would drastically reduce the number of taxpayers who would get any tax benefit for their charitable contributions. They also acknowledged that would likely cause many individuals to give less.

To counteract this, and encourage wealthier taxpayers who were/are more likely to still itemize, the TCJA increased the adjusted gross income (AGI) limitation for cash contributions to a public charity. These are the IRS-authorized 501(c)(3) organizations to which most of us give.

In the new tax reform law, the charitable giving limit went from 50 percent of a taxpayer’s AGI to 60 percent.

As for when donations must be made for tax deduction purposes, gifts made by check or credit cards are considered deductible in the current year if the check is written and mailed or the charge to the credit card posts on or before Dec. 31.

The last day of the year deadline also applies to gifts of appreciated stock. But the date that happens isn’t a quick process.

Stock gifts are considered complete on the date the brokerage firm transfers title. Since this can take several business days, don’t wait until the last minute. Plan this type of donation well before Dec. 31.

Such timing considerations also could affect QCD direct transfers. Again, don’t put off this giving.

Finally, regardless of how or how much you give to charity, the basic tax rules still apply.

Make sure you’re giving to an IRS approved organization. And get receipts for your donations and keep them with your other tax records, just in case the IRS ever has a question about your charitable donation deduction.

Tax Turkeys trot this week: Four turkeys (not counting yours today) down, one to go.

So far this Thanksgiving week, the ol’ blog’s Tax Turkeys to Avoid have been Not reviewing and adjusting if necessary your paycheck withholding on Monday, Nov. 25; Not establishing a bunching strategy on Tuesday, Nov. 26; and Not using, therefore losing, your medical FSA money on Wednesday, Nov. 27.

Enjoy your meal and family and friends. See you tomorrow for the final Tax Turkey to Avoid of 2024.

You also might find these items of interest:

• 6 tax donation deduction tips for Giving Tuesday
• 5 ways to determine whether a charity is naughty or nice
• Tax reform slashed charitable giving by $20 billion a year

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