If you’re feeling the urge to give more to charity this year, you’re not alone. In addition to it being the season for giving, Americans are considering increased donations this year due to recession fears.
According to a study from Fidelity Charitable, nearly 75% of those surveyed said they worry about other community members, and 64% are concerned about nonprofits amid threats of a recession. As a result, 59% of donors may be willing to give more than usual.
What’s the best way to give, tax-wise? That depends on several factors. The impact charitable giving has on the average American’s tax bill has diminished over the years. By 2018, the standard deduction had nearly doubled and has remained high to this day. So, unless your charitable gifts or other deductions push you over the $12,950 (single filer) or $25,900 (married filing jointly) standard threshold for 2022, no separate deduction is available. If you recall a small, above-the-line charitable deduction in recent years ($600 for married couples filing jointly in 2021), that pandemic-era allowance expired. That means that your charitable gifts won’t necessarily help reduce taxes if you’re within that standard deduction threshold.
If you exceed the threshold, however, another tax-saving opportunity kicks in. You can realize it by itemizing your deductions so that every bit counts. Typically monetary contributions up to 60% of a taxpayer’s adjusted gross income (AGI) can be deducted.
One way to push past the standard deduction threshold is to proactively “bunch” a few years of charitable donations into one. This approach can be beneficial in windfall years due to significant capital gains or appreciated assets (including closely held stock and real estate). And while you can earmark those funds for charity all at once, you don’t need to give it away immediately. Instead, you might consider adding that money to donor-advised funds (DAFs). One way to describe DAFs is as interest-bearing personal charitable savings accounts. DAFs allow charitable funds to grow tax-free until you’re ready to give them to a cause of your choosing.
Most large investment brands offer DAFs these days, including recognizable names like Fidelity, Schwab, and Vanguard. Local groups also offer DAF options, the San Antonio Area Foundation among them.
There’s always the traditional way to give as well: as the spirit moves you. But for tax savings, be sure that when you give this way, it’s to a 501(c)3 in good standing, that you get an IRS-friendly gift receipt, and that you give in a way that qualifies you for a potential tax deduction. For instance, you can deduct contributions to a qualified organization for flood or hurricane relief, but not if the donation is earmarked for a specific person or family. You can use tools like Charity Navigator to discover qualified nonprofits.
Have additional questions about charitable giving this year? Feel free to ask us.