Americans have a history of being charitable. According to the Giving USA Foundation's annual report, individuals, corporations, and foundations gave a record $471.44 billion to charities, social causes, and other qualified organizations in 2020. The US tax code encourages charitable giving by providing various income tax incentives to charitably minded taxpayers.
Some of the more common tax-favored charitable donation methods are Cash Donations, Qualified Charitable Distributions, and the donation of Long-Term Capital Gain Property.
Cash Donations - Under the CARES Act (2020) and the Coronavirus Response and Consolidated Appropriations Act (2021), you may temporarily deduct up to 100% of your adjusted gross income donated to qualified charities and organizations provided you itemize deductions on your tax return. If you take the standard deduction, you may deduct $300 for individuals and $600 for married couples for donations made to qualified charities and organizations.
Qualified Charitable Distribution (QCD) – Donations may be made directly to a qualified charity or organization from an IRA if specific rules are followed.
· The IRA owner must be over age 70½.
· QCD's are limited to $100K per person.
· The donation must be made directly from the IRA to the qualified charity or organization.
· QCD's can only be made if the donation would have been deductible if it had not been made from an IRA.
It is crucial that you accurately report a QCD on your tax return to realize this benefit. There is no code or box on the 1099-R that differentiates a QCD from other IRA distributions. The IRA custodian does not report QCD's to the IRS or the taxpayer. You must retain documentation from the qualified charity or organization as you would for a cash donation. Report the full IRA distribution on form 1040 and then the taxable amount on the appropriate line. Enter QCD in the margin next to the IRA distribution line.
Qualified Charitable Distributions most benefit those who do not itemize deductions and plan to donate more than $300 for individuals and $600 for married couples per year to qualified charities or organizations. It would also be of particular benefit to those who do not itemize deductions and are subject to Required Minimum Distribution (RMD). Qualified Charitable Distributions count towards satisfying Required Minimum Distributions.
Long-Term Capital Gain Property – Property you've owned for more than a year may be subject to long-term capital gains tax should you sell it. One way to avoid this tax is to donate the property to a qualified charity or organization. You can generally deduct the donation's fair market value, not just your basis, up to a percentage of your Adjusted Gross Income. The donated property may include stocks, bonds, ETFs, or mutual funds. The property or shares must be transferred directly to the qualified charity or organization to realize this benefit.
Congress makes periodic changes to the tax code that may impact the income tax advantages of charitable donations for a given year. There have been multiple changes in recent years. You should consult a tax professional to determine how the tax code may apply to your charitable plans for a particular tax year. You can find more information regarding the tax treatment of Charitable Contributions in IRS publication 526. https://www.irs.gov/publications/p526