If you gave to charity, check to see that you have substantiation
When making charitable donations, taxpayers must remain aware of various factors to determine if their donation will be tax deductible. Taxpayers will typically claim the standard deduction in lieu of itemizing if the standard deduction exceeds all applicable itemized deductions. The standard deduction will be $29,200 in 2024 for a married couple filing jointly. State and local taxes (up to the $10,000 limitation), mortgage interest paid, and charitable donations represent the three most common itemized deductions available. If claiming the standard deduction, no charitable donations will be tax deductible.
Through proactive tax planning, a taxpayer can push multiple years of charitable donations into one year. “Bunching” involves making two years of donations in one year to push total itemized deductions over the standard deduction threshold described above. The taxpayer would then claim the standard deduction in the second year, which results in more deduction between the two years than permitted under the standard deduction alone.
Establishing a donor advised fund can provide an enhanced “bunching” benefit. For tax purposes, charitable donations occur when the donor donates cash or property to the donor advised fund. Under this approach, several years of donations can be recorded in one year to maximize the itemized deduction. The funds can be invested and paid out to charities as the donor desires
In lieu of cash, appreciated stocks, real estate, or business property held longer than one year can be donated. This permits an enhanced tax benefit as the donor receives a charitable deduction for the current fair market value of the assets and avoids any capital gains taxes. In most cases, total donations are limited to 30% of adjusted gross income for non-cash donations and 60% of adjusted gross income for cash donations.
For taxpayers at least 70.5 years of age with an IRA, a qualified charitable distribution (QCD) permits a tax benefit from charitable donations even if the taxpayer does not itemize deductions. Instead of receiving a check for the IRA distribution, the IRA custodian sends distributions directly to an eligible charity. The QCD counts toward the required minimum distribution (RMD) amount but is not included in taxable income. Accordingly, a taxpayer can avoid paying tax on a portion or all their RMD and still claim the standard deduction if advantageous. The custodian must directly transfer the QCD to an eligible charity. Furthermore, donor advised funds cannot accept QCDs.
Furthermore, taxpayers must obtain proper documentation to deduct charitable donations. An acknowledgement letter from each charity must be obtained for any contribution $250 or over prior to filing the tax return. Except for publicly traded securities, a qualified appraisal must be obtained for any property donated with a fair market value of $5,000 or more. When using a donor advised fund, the fund provider issues acknowledgment at the time of initial donation. This provides an advantage when donating to several different charities as obtaining acknowledgment letters from each charity is not necessary.
To ensure you are taking full advantage of all the tax benefits available for charitable donations, please reach out to our tax professionals at 415 Group.
