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  • Donation Deductions

    Donation Deductions

    I’ve found that many people don’t fully understand how taxes related to charitable donations work. In this email, I will explain it and provide helpful tips to help you minimize your taxes even further.

    Some people say, “I donated $500 to charity, but it had no impact on my taxes. Why?”

    First, when you file your taxes, you choose between taking the standard deduction or itemizing your deductions, whichever is higher. In 2024, the standard deduction is $14,600 for single filers.

    In order to receive a deduction for charitable donations, you must itemize your deductions (by filing a Schedule A form). In the U.S. 80% of filers use the standard deduction because it is typically higher than itemized deductions for them.

    This means that for most people, you won’t receive a tax deduction for charitable donations. Of course, many people donate without caring about the tax deduction, but it’s helpful to be aware of the rules.

    Here are a few additional tips related to charitable deductions and taxes:

    1. Use a Donor Advised Fund (DAF)

    For example, let’s say the standard deduction is $14,600 for your filing status, but your itemized deductions total $12,000. You donate $500 every year, so you never receive the tax benefit of donating.

    This is where a DAF can come into play. A DAF is a charitable investment account set up solely for the purpose of donating to charities. You contribute money into the DAF and then make donations to charities from it. You can also invest the money within the DAF.

    Why is this beneficial?

    Well, let’s say you donate $500/year. With a DAF, you could donate $5,000 all at once, receive an immediate tax deduction, and then spread those donations out over the next 10 years.

    In our example, this would increase your itemized deductions to $17,000 (assuming you have sufficient Adjusted Gross Income), allowing you to claim a tax deduction.

    While this strategy requires having the means to make a larger donation upfront, it can be a great way to lower your overall tax impact.

    1. Appreciated shares instead of cash

    Let’s say you plan to donate $500 in cash to charity. You also have 2 Apple shares worth $500 in your taxable brokerage account, with $400 in gains ($100 cost basis)

    Instead of donating the $500 in cash, you can donate your 2 Apple shares, valued at $500. Then, you use the $500 you would have donated in cash to repurchase Apple shares. You receive a fair market value (FMV) deduction for your donated shares, so $500 (assuming you have sufficient Adjusted Gross Income).

    What this accomplishes is that you increase the cost basis of your new investment by $400 (the original basis was $100, and now it’s $500). This strategy allows you to pay less in taxes when you eventually sell those new shares.

    1. Traditional IRA + QCD

    If you are age 70½ or older, you can make a Qualified Charitable Distribution (QCD) from an IRA.

    A QCD can be made for up to $105,000 per year, and this limit applies separately for each spouse. The QCD can satisfy the Required Minimum Distribution (RMD) requirement on IRAs, and the best part is that you don’t have to itemize deductions to receive the benefit.

    Since the money is a direct transfer from your IRA to the charity, you never realize the income, which means you can still claim the standard deduction.

    I hope you learned something new. Any feedback? You can always reply back.

    Enjoy your weekend.

    MC, CPA

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