Consider These Tax Strategies for Charitable Contributions

In 2017, Congress passed the Tax Cuts and Jobs Act, which, among many changes, both lowered tax rates and increased (doubled) the standard deduction. In fact, those who itemized deductions on their taxes decreased from 31% to an estimated 14% (taxfoundation.org) because of the higher standard deduction ($12,950 for single filers, $25,900 married in 2022.)

While this change simplifies returns and lowers taxes for many filers, some charitably inclined individuals found they no longer received a deduction for their charitable gifts because they were no longer itemizing and taking the higher standard deduction. The good news for these filers, however, is that there are still ways to make charitable contributions and lower their taxes. One of these ways is the qualified charitable distribution, commonly called “QCDs.”

Are qualified charitable distributions for you?

A qualified charitable distribution is an otherwise taxable distribution from an IRA (not including an ongoing SEP or SIMPLE IRA) that is paid directly from the IRA to a qualified charity. The word “qualified” is important – you can’t simply gift the money to a friend or family member. The charity must be one that is approved by the IRS. Eligible charities include 501(c)(3) organizations and houses of worship. Donor-advised funds aren’t eligible to receive QCDs on a tax-advantaged basis.

QCDs offer several benefits – the first being a perfect place to apply your required minimum distributions.

The IRS requires taxpayers older than 72 (it used to be 70 ½, but changed to 72 in 2019) to take a required minimum distribution from their IRAs each year. This forced distribution adds to the taxable income you must report on your annual return. But by using a QCD to donate that money to charity, you can lower your tax liability. That's because the amount given to charity using a QCD does count toward your IRA’s annual RMD, but it doesn’t count against your annual taxable income.

By using QCDs, individual IRA owners can gift up to $100,000 each year. Couples filing jointly can gift up to $200,000. But remember that this option is only available for IRA owners over the age of 70½. It can’t be used for 401(k)s, 403(b)s, thrift savings plans, or other plans.

Another important point to consider is that the funds must be made payable directly from the IRA to the charity. You can’t take possession of the RMD funds and then write a check. (That said, some IRA trustees will mail you a check directly. But you can simply give that check to the charity, instead of depositing it yourself.)

When does it make sense?

It usually makes the most sense to take a QCD when taking the standard deduction. For those itemizing, it often makes more sense to donate appreciated assets, since that will also help mitigate your taxes on capital gains.

For those younger than 70½ years old, there’s another option called “bunching.”

Bunching is the process of taking as many tax-deductible expenses as possible (such as charitable contributions and property tax) in a single tax year. In the year that you’ve bunched your deductions, you itemize them on your taxes. The following year, you take the standard deduction.

It's a matter of alternating the years you itemize your deductions. For instance, a family might typically give $10,000 to charity in a year. If bunching, they may instead elect to give $20,000 one year, then $0 the next.

How does bunching work?

For example, a married couple may have $30,000 of itemized deductions in a typical year (between charitable contributions, property taxes, etc.). And because their itemized deduction of $30,000 is higher than the standard deduction of $25,900, it makes sense to itemize their deductions.

But if the couple “bunched” two years’ worth of deductions in a single year, they would save about $5,698 in taxes (using a 22% marginal tax rate). This is because their $30,000 in deductions each year ($60,000 total) turned into $85,900 total ($60,000 one year, $25,900 the next).

These two examples - QCDs and bunching - are just two strategies (out of many) to make the most out of charitable contributions. To see what might be the right fit for you, reach out to your financial professional. If you don’t have one, feel free to reach out to our team. 

Hunter Yarbrough, CPA, CFP, is a vice president and financial adviser with CapWealth. He is passionate about taking a holistic view of personal finance, including investments, taxes, retirement, education, estate planning, and insurance. For more information about Hunter and CapWealth, visit capwealthgroup.com.

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