4 Ways to Benefit from Tax Laws When Giving to Charity

• Author: William Asher
• Posted: 2024-08-27

Tax laws have changed recently in a way that has disincentivized charitable giving. For many charities, this has caused them to struggle. While many donate to worthy causes to help themselves feel good, others need some sort of a financial push to do so. There are still ways to use the tax laws to your advantage when it comes to charitable giving, even though the 2017 tax law did make it more difficult to receive tax benefits. Here, are four ways that you can still square your charitable giving with your yearly tax bill from the Internal Revenue Service.

CARES Act Tax Credit

By changing the tax rates and raising the standard deduction, people do not have as much incentive to give money to their favorite charity. Those who do not itemize their taxes are not able to deduct what they give to charity. Given that there is a $10,000 cap on state and local taxes and the standard deduction is now over $12,000, fewer taxpayers will be itemizing.

However, one of the lesser-noticed provisions of the CARES Act was a $300 tax credit for a charitable donation. Taxpayers can take this credit regardless of whether or not they itemize their taxes. Thus, the first $300 that they donate will come back to taxpayers dollar-for-dollar when they file their next tax return since it is an above the line deduction. The only limitation is that the organization must be a recognized 501(c)(3) charity. This credit applies only to cash donations as opposed to property or securities.

Not only is there the new tax credit for 2020, but the limitation on deductions for charitable donations is also removed. Previously, taxpayers who itemized were only allowed to take 60% of their contributions and deduct them. For 2020, taxpayers can take a 100% deduction when they itemize their taxes.

Donations from an IRA Account

New retirement legislation raised the age when one must take a required minimum distribution from their IRA or other retirement accounts. Now, this must be done at the age of 72. A little known provision of tax law allows a retiree above the age of required minimum distribution to take up to $100,000 from their retirement account and be able to donate it tax-free to a charity. Usually, a retiree will need to pay taxes when they cash in their retirement account since their contributions were tax-deferred. This is a great way for someone to leave a legacy donation to their favorite charity.

Setting Up a Trust

Establishing a charitable trust has numerous benefits for a taxpayer. Even though the money does not go to the charity until after the taxpayer dies, the minute the trust is established, they can take a charitable donation tax deduction from their taxes. This is because once the asset is placed in the trust, it passes out of the taxpayer's control. They no longer have beneficial ownership so they can take the tax break while they are still alive. The tax break is spread out over five years.

The most common type of charitable trust is called a charitable remainder trust. This money is managed on your behalf and can even produce income for you while you are still alive. When you die, the money in the trust will then get donated to the charity that is the beneficiary of the trust. One good thing about this trust is that the charity may sell assets that you gift into the trust without you needing to pay capital gains tax. You can earn income off the full amount of the proceeds.

For purposes of the estate tax, a charitable trust takes the assets out of the estate. This will lower the tax burden.

Donate Personal Property

Even if you do not want to give money, you can donate property to charity. This can include your car or even extra clothing. However, this has the same rules as money in terms of deductibility. If you do not itemize your taxes, you cannot tax a deduction for donating property. However, if you do itemize on your taxes, you need to be careful when valuing the assets that you have donated. The IRS is suspicious when they see large amounts of donated property. At the very minimum, you need to keep receipts and documentation of what you have given away in case you get audited by the IRS.