Strategies for Lowering Taxes through Charitable Giving
In the wake of President Donald Trump's tax reform laws, charitable giving and tax deductions are undergoing significant changes. Here's what you need to know about making tax-deductible donations and maximizing your deductions.
Boosting Your Itemized Deductions
With a strategy known as "bunching," you can potentially increase your itemized deductions for the current year, surpassing the standard deduction amount. This approach allows you to claim larger deductions in alternate years, thereby minimizing your tax liability.
Deduction Limits
For certain types of contributions, the deduction might be limited to 50% of your Adjusted Gross Income (AGI). There's a 30%-of-AGI limit for capital gain property contributed to certain organizations. It's essential to be aware of these limits to ensure you're making the most of your charitable contributions.
Qualified Charitable Distributions (QCD)
For taxpayers aged 70 1/2 years or older, QCDs can be transferred directly from a traditional IRA to charity, without the donation being deductible but also not included in taxable income. Moreover, QCDs count towards the required minimum distribution (RMD).
Cap on Itemized Deductions
Starting in 2026, a 35% cap will be implemented for all itemized deductions. However, from 2018 through 2025, there is no cap on itemized deductions.
Donation Limits and Carryovers
The amount you can deduct can be limited or reduced. For example, if a benefit is received in return for a donation, the value of the benefit must be subtracted from the deduction. If a deduction is denied due to the limits, the excess amount can be carried over and deducted on a future tax return (carryovers are generally limited to five years).
Cash and Non-Cash Donations
Charitable donations that are itemized (generally non-cash gifts) must exceed 0.5% of the adjusted gross income before qualifying for a tax deduction, starting in 2026. For property donations worth $500 or more, Form 8283 must be submitted with the return. If the donated item is a motor vehicle, boat, or airplane worth over $5,000, an appraisal might be required.
Tax-Exempt Organizations
Only contributions to IRS-approved tax-exempt organizations, such as charities or non-profit 501(c)(3) organisations, are tax-deductible. You can use the IRS's online "Tax Exempt Organization Search" tool to determine if an organization is tax-exempt and eligible to receive tax-deductible charitable contributions.
Non-Itemizers' Deductions
Starting in 2026, non-itemizers will be allowed to deduct up to $1,000 in cash donations ($2,000 for joint filers) without itemizing, provided the donations are made to qualifying 501(c)(3) charities or non-profit organizations.
Written Acknowledgment and Volunteer Expenses
If a charitable donation is $250 or more, a written acknowledgment from the charity is required, stating the amount of any cash donation and a description (but not value) of any donated property, and whether the charity gave any goods or services in return for the contribution. Additionally, itemizers can deduct out-of-pocket expenses paid to do volunteer work for a charitable organization, such as gas, oil, parking, and tolls, but not amounts that are reimbursed.
Donor-Advised Funds
A donor-advised fund allows you to make one large contribution and deduct the entire amount as an itemized deduction in the year you make it, with money from the fund then sent to the charities of your choice over the next few years.
GoFundMe Donations
Donations given through a GoFundMe page to help a local business or a neighbor are typically not tax-deductible.
Impact on 501(c) Organizations
There is no specific public information available about which 501(c) organizations will be affected by President Donald Trump's tax reform laws in the years 2026 and beyond.
In conclusion, understanding the changes in charitable giving and tax deductions is crucial for maximizing your benefits. Always ensure you're contributing to IRS-approved tax-exempt organizations and follow the rules and guidelines to claim a tax write-off.
