I would bet that everyone likes to help others, and no one likes to pay taxes. Well now is your chance to do both. There are only a few more days left to leave an impact of those in need and reduce your income tax liability for 2022.
Picking out your favorite charity is the easy part. Now you get to determine how best to benefit from choosing the right amount, asset and process.
In a perfect world, we would donate regardless of a tax deduction, but it may also be helpful to be aware of what savings you can create as a result of your philanthropy.
First, identify what type of donation is best for you. The charity will benefit regardless of whether you donate cash, stocks, mutual funds, or a car. The charity can turn anything into cash tax free. Therefore, if you have an appreciated asset, such as shares of a stock or mutual fund, it is best to donate the shares rather than sell first. This way you can avoid paying capital gains tax on the investment. The charity does not have to pay capital gains tax.
Next, determine whether you are eligible to take a tax deduction for your donation. If you can itemize, perhaps due to high medical expenses, mortgage interest and property tax, then your charitable deduction can be added to your itemized deductions. Unfortunately, the $300 per person deduction without itemizing ended in 2021 and is no longer available.
If you don't exceed the standard deduction, then work with your advisor to consider bunching deductions. This is where you double up on charitable gifts in one year and then take a year off donating and use the standard deduction in those alternate years.
The standard deduction for 2022 is $12,950 for single filers ($13,850 in 2023) and $25,900 for joint filers ($27,700 in 2023). If you can't exceed these amounts on your Schedule A, you will need to beef up your charitable contributions in certain years in order to itemize.
You may also consider contributing to a donor-advised fund (DAF), where you can contribute appreciated shares of a business or investment without paying tax on the gain. Once this asset resides in the DAF, you have the rest of your life to distribute to your favorite charities as you wish. Therefore, if you have a large asset you would like to donate and take the deduction all in one year, this strategy could be a good fit for you.
Retirees over age 70 1/2 are eligible to take up to $100,000 out of their pre-tax retirement plan or IRA and gift directly to a charity through a qualified charitable distribution (QCD) and still not have to itemize.
There may be other year-end strategies you can benefit from, such as tax-loss harvesting, maximizing your retirement contributions, or converting some of your pre-tax IRA or 401(k) to a Roth. Consider meeting with your advisor early in 2023 to start planning for next year as well.
Patricia Kummer has been a Certified Financial Planner professional and a fiduciary for over 35 years and is Managing Director for Mariner Wealth Advisors.