At this time of year, many of your clients may be in a giving mood. Here are 12 charitable giving tips for the holiday season.
Tip #1: Claim above-the-line deductions. For many taxpayers, charitable contributions no longer produce tax savings, since the taxpayers no longer itemize deductions due to the doubling of the standard deduction amounts. However, thanks to a special COVID-19 relief provision, nonitemizers will get some tax bang for their charitable bucks in 2021. Under the special rule, taxpayers who do not itemize deductions can claim above-the-line deductions from gross income for cash donations to charity in 2021. The maximum deduction is $300 for single filers and $600 for joint filers [Code Sec. 170(p)].
Tip #2: Max out itemized deductions. A related provision increases allowable deductions for 2021 charitable donations by taxpayers who itemize deductions. As a general rule, itemized deductions for cash contributions to most charities are currently limited to 60% of the taxpayer’s contribution base—generally, adjusted gross income (AGI). However, for 2021, the COVID-19 relief provision pops the cap, allowing deductions up to 100% of the contribution base [CCA, 2021 Sec. 2205].
Tip #3: Bunch donations for deductions. A taxpayer whose itemized deductions are close to—but not more than—the standard deduction may be able to put their deductions over the top by bunching donations in one year. For example, suppose a taxpayer routinely contributes $5,000 to charity each year. The taxpayer who is married and files jointly has made his regular contribution for 2021. He has about $19,000 of other expenses that qualify as itemized deductions, but when combined with his $5,000 contribution the total ($24,000) falls just below the standard deduction of $25,100 for joint filers for 2021. However, if the taxpayer accelerates the $5,000 donation he would normally make in 2022, he will increase his itemized deduction to $29,000—well above the standard deduction.
Tip #4: Give now, pay later. In some cases, a client’s charitable impulses may not match up with cash on hand after holiday expenses. However, taxpayers should bear in mind that contributions charged on a credit card are considered made and deductible in the year the charge is made. The same generally is true for checks. A contribution by check dated and mailed to a charity in 2021 is considered delivered on the date of mailing, regardless of when it is received and negotiated by the charity.
Tip #5: Donate appreciated stock. A tax-wise giving strategy is to donate stock that has appreciated in value. As a general rule, a taxpayer can take a full fair-market value deduction for the donated stock—but does not have to pay capital gains tax on the appreciation in value. This rule applies, however, only if the stock has been held for more than one year. If the stock was held for less than one year, the appreciation that would be short-term capital gain is not deductible.
Tip #6: Dump depreciated stock. The opposite strategy is true for depreciated stock. By selling the stock and donating the proceeds, the taxpayer will get two deductions in one: a capital loss on the sale of the stock and an itemized deduction for the donated proceeds.
Tip #7: Give a Qualified Charitable Deduction. Under current rules, taxpayers who have money socked away in an IRA must begin taking required minimum distributions (RMDs) in the year following the year they reach age 72 (up from age 70 1/2 under prior law). However, many taxpayers who are sitting on an IRA nest egg don’t need the funds for living expenses. One tactic is to use the IRA funds to make a qualified charitable distribution (QCD). A QCD does double duty—the amount of the QCD is excluded from taxable income and the distributed amount can be counted against the RMD for the year.
Tip #8: Give gently used items. Donations of clothing or household items to charity are deductible, provided the items are in good used condition or better. The deduction is limited to the fair-market value of the item, not the amount the taxpayer originally paid for it. Organizations that accept donations have guides available for pegging the value of donated items. Donations can also be tracked and valued on ItsDeductible, a free, online app.
There is an exception to the requirement that donated items be in good used condition or better. A taxpayer can claim a deduction for an article of clothing or household item that’s in less than good used condition if it’s valued at more than $500 and the value is supported by a qualified appraisal.
Tip #9: Give time, not money. Donating services to a charitable organization—a community pantry or a group that reconditions used toys for kids, for example—may be particularly heartening at holiday time. Taxpayers cannot deduct the value of their services, but can deduct out-of-pocket expenses incurred in performing the services. The expenses must be unreimbursed, directly connected with the volunteer services, and incurred only because of the volunteer activity. For example, the cost of a uniform that must be worn while volunteering would be deductible. Car expenses for travel to and from the charitable activity also qualify for deductions. Instead of keeping track of actual expenses, taxpayers can take a short cut and deduct 14 cents per mile for their charitable driving.
Tip #10: Consider payroll deductions. If the taxpayer’s employer sponsors a payroll deduction program for charitable donations, the taxpayer may want to sign up for the coming year. Payroll deductions are a good way to spread out donations throughout the year while meeting charitable giving goals. Unlike payroll deductions for health and other benefits, which are made on a pre-tax basis, payroll deduction donations are made with after-tax dollars. Therefore, the donations are deducted from income at tax time.
Tip #11: Record your donations. As a general rule, a taxpayer must have a record for any cash contribution in the form of a bank record, or a written receipt or letter from the charity showing the name of the charity, the date of the contribution, and the amount. A single contribution of $250 or more must be supported by a contemporaneous written acknowledgement from the charity. Special documentation rules apply to other types of donations.
Tip #12: Check out your charities. Taxpayers will want to make sure the objects of their charitable giving are on the up-and-up. The IRS Tax Exempt Organization Search Tool on irs.gov can be used to check on an organization’s eligibility to receive charitable contributions.