How to Lower Your Tax Bill With the Charitable-Donation Deduction: Getting a tax break for contributions to charity often requires careful planning

Are fewer taxpayers deducting charitable contributions than in the past?

Yes. The 2017 tax overhaul dramatically reduced the number of filers deducting charitable donations. While it didn’t limit them outright, it expanded the standard deduction so that far fewer taxpayers itemize these deductions on Schedule A.

The number of taxpayers itemizing charitable donations dropped to about 12 million in 2021 from about 37 million in 2017, according to the most recent data from the Internal Revenue Service. During the pandemic, Congress temporarily expanded tax deductions for very large and very small charitable donations, but these changes expired at the end of 2021.

Are there still ways for donors to maximize deductions for charitable donations?

Yes, there are several. A simple one is to bunch donations every few years to get over the hurdle of the higher standard deduction. For example, say that Stacey and Dana typically donate $12,000 to charity, but they have paid off their mortgage and their state and local tax deduction, or SALT, is capped at $10,000.

As a result, taking the 2023 standard deduction of $27,700 makes more sense for this couple than itemizing deductions on Schedule A—and they get the full standard deduction without making any donations.

The outcome is different if the couple donate $24,000 every two years rather than $12,000 every year. The larger donation plus their $10,000 SALT deduction means it makes sense to itemize for the years they make donations and claim the standard deduction for the other years.

What about other ways to maximize the deduction?

One way is to donate appreciated investments such as shares of stock or cryptocurrency held longer than a year in a taxable account. In this case, the donor can receive a deduction for the asset’s fair market value without owing tax on the appreciation, although conditions apply. For example, crypto investors need a formal appraisal if they want to deduct a donation of more than $5,000 of cryptocurrency.

Charitably minded taxpayers should also consider what is called donor-advised funds. These popular accounts enable donors to bunch smaller gifts into one large amount and take a deduction in the year of the gift. The donor then recommends later which charities will be recipients of donations. Meanwhile, the assets can be invested and grow tax-free, although the accounts have fees.

Are there donation strategies that are only for seniors?

Donors who are age 70 ½ or older can take advantage of an excellent option if they have traditional IRAs: qualified charitable distributions, or QCDs. For 2024, these givers can contribute IRA funds totaling $105,000 directly to one or more charities. These donations aren’t deductible on Schedule A, but the withdrawals aren’t taxable and don’t raise adjusted gross income, or AGI.

That, in turn, can help reduce Medicare premium surcharges based on AGI and the 3.8% investment-income tax, among other benefits. QCDs also count as part of the IRA owner’s required minimum withdrawals, if any. Many donors who make QCDs can still take the standard deduction.

Beginning in 2023, IRA owners can contribute traditional IRA funds tax-free to an IRA charitable gift annuity. These annuities benefit a nonprofit (often a college or religious group) and pay the IRA owner taxable income for life. Under current law, IRA gift annuities can only be done once in a donor’s lifetime—although the giver can split the total among several nonprofits in that year. The limit is $50,000 for 2023 and $53,000 for 2024. The gift counts toward the donor’s QCD limit for the year, and other rules are similar to those for QCDs.

For more information, see IRS Publication 526, Charitable Contributions.

 Source: WSJ