Tips for Donors Who Can’t Use Deductions
Only about one-third of U.S. taxpayers itemize federal income tax deductions, meaning that the other two-thirds generally receive no tax benefits when they make charitable contributions. Nonitemizers also include many individuals with relatively high incomes. More than 2 million taxpayers with adjusted gross income above $100,000 regularly take the standard deduction.
IRS studies indicate that older taxpayers, in particular, use the standard deduction, which for 2017 is $7,900 for single individuals who have reached age 65 and $15,200 for joint returns where both spouses are age 65 or older. Seniors often no longer have mortgage interest to deduct and also incur lower miscellaneous expenses and state sales or income taxes. But tax savings may yet be available to donors who generally can’t use deductions.
- Doubling (or tripling) up on charitable deductions by pre-paying future years’ annual contributions to charities is a traditional strategy. A donor who contributes $5,000 annually to an organization could instead give $15,000 every three years, preferably in appreciated securities. (Note that even nonitemizers save by giving appreciated securities and avoiding capital gains tax.) Another plan would be to make several years’ worth of annual contributions to a donor advised fund maintained by a community foundation or financial service organization. The deduction could be sufficient to let donors itemize and they can advise charitable grants over the next several years.
- Clients age 70½ or older are able to divert required minimum distributions from IRAs to public charities (qualified charitable distributions). No charitable deductions are available, but donors aren’t taxed on RMD amounts passing to charity. This reduces not only taxable income but also adjusted gross income — the measuring stick for a variety of tax penalties. In some cases, QCDs also reduce state income taxes, possibly in states that have no contribution deductions.
- Nongrantor charitable lead trusts also reduce donors’ income taxes indirectly by diverting investment income to charitable organizations during the trust term.
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