The December 31 deadline is fast approaching for making tax-deductible charitable contributions for tax year 2021. This date is also the deadline for two tax breaks related to charitable giving that were part of legislation designed to provide pandemic financial relief to taxpayers.
Deduct Charitable Donations Without Itemizing
This year, you can deduct up to $300, or $600 if you’re married and file jointly, in cash donations made to qualified charities (or 501(c)(3) organizations) even if you don’t itemize deductions on your income tax return. Normally, Schedule A with itemized deductions must be completed in order to deduct charitable contributions.
Cash contributions include contributions made by check, credit or debit card and electronic funds transfer — not just currency. They don’t include the value of property like household items, securities or volunteer services. Certain kinds of cash contributions don’t qualify for this tax break, including contributions:
- Carried forward from previous years.
- Made to charitable remainder trusts and most private foundations.
- Made to establish or maintain a donor advised fund (DAF).
- Made to an organization supporting the charity.
Since the standard deduction was increased as part of the Tax Cuts and Jobs Act (TCJA), more taxpayers choose to claim this than to itemize deductions, which requires more time, paperwork and recordkeeping. An estimated 30 million taxpayers have switched to the standard deduction since the legislation passed in 2017.
The other tax break that was part of the TCJA is an increase in the percentage of adjusted gross income (AGI) that can be deducted for charitable donations to 100% of AGI. Unless Congress acts to extend this break, it will revert to the previous limit of 60% of AGI in 2022.
More Tax-Wise Giving Tips
Here are a few more tax-wise charitable giving tips to keep in mind as year-end approaches:
- Donate appreciated securities instead of cash. Donating assets that have appreciated in value, such as stocks, instead of cash could benefit both you and the charity. You will avoid having to pay capital gains tax on the appreciation and the charity will receive the full current value of the asset. For example, let’s say you bought a stock 5 years ago for $2,000 and it’s now worth $5,000. If you sold it and donated the proceeds to charity, you’d pay a capital gains tax as high as 23.8% on the $3,000 gain, or about $700, leaving just $4,300 for the charity. But if you donate the stock, you’ll avoid the $700 tax bill and you can deduct the current value of $5,000 instead of your cost basis of $3,000. The charity, meanwhile, can sell the stock and pocket the $5,000. Note that if you donate appreciated cryptocurrency to charity, you must obtain a qualified appraisal of the cryptocurrency.
- Bunch your donations into a single tax year. This could enable you to exceed the standard deduction ($12,550 for single filers and $25,100 for married couples filing jointly in 2021) which might justify itemizing deductions using Schedule A. For example, let’s say you and your spouse make $10,000 in charitable donations in a typical year and also have the full $10,000 sales and local tax (SALT) deduction. This would be less than the $25,100 standard deduction so you wouldn’t reap a tax benefit from your charitable donations (other than $600 this year). Instead of giving $10,000 to charity this year, you could wait and donate it in 2022. This would boost next year’s total deductions to $30,000, which exceeds the standard deduction.
- Make a Qualified Charitable Distribution (QCD). If you’re over age 70½, you can make a non-deductible QCD of up to $100,000 from your traditional IRA this year. Using a QCD to make charitable contributions is especially beneficial if you must take required minimum distributions (RMDs) from your traditional IRA. A QCD will satisfy your RMD obligation for this year while also saving you money on taxes and helping you support your favorite charitable causes. QCDs are not considered taxable income, which can lower income taxes and income-based Medicare premiums. Making a QCD also enables you to realize tax benefits from charitable contributions if you don’t have enough in deductions to itemize.
December 31 is right around the corner so act quickly in order to benefit from these expiring tax breaks or execute the other strategies. Be sure to speak with a tax advisor about the details of your specific situation.