Giving Tuesday is approaching, and it’s possible to score a tax break while funding your favorite cause. But there are key rules to know before opening your wallet, experts say.
However, “many people give money and don’t get any tax benefits because they don’t donate enough to itemize,” said certified financial planner Jeremy Finger, founder and CEO at Riverbend Wealth Management in Myrtle Beach, South Carolina.
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Here’s what to know about how to qualify for a charitable tax break.
You must ‘itemize’ to claim the charitable deduction
When filing your return, you reduce your taxable income by subtracting the greater of either the standard deduction or your total itemized deductions — which may include charitable donations.
Signed in 2017, former President Donald Trump‘s signature tax overhaul nearly doubled the standard deduction, making filers less likely to itemize.
For 2022, the standard deduction is $12,950 for single filers or $25,900 for married couples filing together. And if you take the standard deduction in 2022, you can’t claim an itemized write-off for charitable gifts.
Aim to give profitable assets
If you expect to itemize deductions, your charitable write-off depends on the type of asset you donate.
Juan Ros, a CFP at Forum Financial Management in Thousand Oaks, California, said profitable investments in a taxable brokerage account are “generally the best type of asset to give.”
Here’s why: By donating an appreciated asset, you’ll receive a charitable deduction equal to the fair market value while avoiding capital gains taxes you’d otherwise owe from selling, he said.
Of course, you’ll want to confirm your preferred charity can accept non-cash donations.
With most portfolios down 15% to 25% for the year, it may be tempting to offload stocks that have declined in value. But it’s better to sell those assets, harvest the losses and donate the cash proceeds to charity, Ros said.
Consider a charitable transfer from your individual retirement account
If you’re 70½ or older, donating directly from a traditional individual retirement account is “usually the best way to give,” said Mitchell Kraus, a CFP and owner of Capital Intelligence Associates in Santa Monica, California.
The strategy, known as a “qualified charitable distribution,” or QCD, involves a direct transfer from an IRA to an eligible charity. You can give up to $100,000 per year and it may count as your required minimum distribution if you transfer the money at age 72.
Since the donation doesn’t show up as income, you’ll still be getting a tax break, even if you don’t itemize deductions, Kraus said. Reducing your adjusted gross income may help avoid triggering other tax issues, such as higher Medicare Part B and Part D premiums.