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Giving Tuesday has come and gone for 2022 – it’s the annual day of donating time and money to charitable causes, falling on the Tuesday after Thanksgiving (and after the spending extravaganzas known as Black Friday and Cyber Monday).
According to a how-to guide published by GOBankingRates earlier this year, “By claiming charitable donations as tax deductions on your tax return on Form 1040, Schedule A, Itemized Deductions, instead of claiming the standard deduction, you could even lower your taxable income.”
In this scenario, your total charitable donations would need to be more than the 2022 thresholds for standard deductions, which are $25,900 for couples filing jointly, $12,950 for single filers or married couples that file individually and $19,400 for heads of household, according to the IRS.
You’ll also need to be sure that your charitable donation is going to a tax-exempt organization in order for it to be deducted. That list includes churches, synagogues and mosques; nonprofit schools; veteran groups; and service organizations like The Salvation Army, American National Red Cross and United Way, among others. Also necessary is a record of donations for anything over $250, in which case you’ll need a written confirmation from the benefitting organization. This is important to retain in the event of an audit by the IRS in future years.
Once those proverbial boxes are checked off, you’ll be able to take advantage of the tax breaks — and financial advisors have pointed out that there are some key strategies for tax-efficient giving before the end of the year.
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“Bunch” contributions for itemized donations
CNBC spoke to financial expert Cory Robinson, VP and portfolio manager for Tom Johnson Investment Management, who suggested “bunching” 2022 and expected 2023 contributions through a donor-advised fund for greater impact.
If your charitable donations don’t exceed the standard deductions mentioned above, taking this step will help you surpass the threshold by combining contributions. As CNBC explained, “donor-advised funds are like a charitable checking account, allowing a bigger upfront deduction and the ability to make future gifts from the account.”
Consider donating cash from the sale of securities
Donations don’t have to be given simply as liquid cash or physical assets. They can be executed as alternative financial transactions, such as the sale of stocks and securities. One great tactic, per Charles Schwab, is taking a look at what securities have depreciated over the year, selling them and donating the cash proceeds in order to bring down your tax bill.
“Sell those securities at a loss and use tax-loss harvesting to offset capital gains and up to $3,000 of ordinary income. [You] can then claim a charitable deduction [by] donat[ing] cash from the sale proceeds.”
Avert penalties from withdrawing from retirement accounts
If you are under the age of 59½ and planning on taking out a withdrawal from your 401(k), you will incur a 10% penalty, according to CBS News. Unless you use a charitable deduction to “offset the tax liability,” advised Charles Schwab. This advice also applies if you are trying to convert a traditional retirement account to a Roth IRA.
Look into qualified charitable distributions
If you’re over the age of 70½, you can do a qualified charitable distribution (QCD) which offers a direct financial transfer from an IRA retirement account to a charity. Doing so will reduce your adjusted gross income for the year in a big way — especially since the maximum contribution is $100,000 per year (or $200,000 for married couples when each spouse has their own IRA account), per CNBC.
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Don’t miss out on employer matched contributions
Check your company’s policy on gifting — some will match employee’s contributions, which allows your own donated funds to go twice as far for the charity of your choice. As Think Advisor detailed: “Many companies offer matching programs for tax-deductible donations to charity, often up to a capped amount. Make sure you are maxing these out if you have the cash flow as they expire each year, and without them you are leaving free money on the table.”
Consider all eligible donations
While most people may know that traditional gifting to 501(c)(3) organizations are eligible for tax write-offs, there are other options for donations that also qualify. For example, GOBankingRates reported in September that school supply donations can also be itemized — and not just pencils, either.
If you have old computers and electronics lying around, organizations like Compudopt refurbish old systems and then provide them to schools in low-income neighborhoods. As well, according to Morgan Stanley, investing into a 529 Education Savings Plan for children and grandchildren is a great way to make a contribution without a federal gift tax — and “many states offer state income tax deductions to residents who contribute to their own state’s plan.”
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