Believe it or not, more than half of 2022 is in the rear-view mirror, and it is time to start planning year-end financial concerns. For many of us that includes tax considerations, including charitable contributions. Simply sending money to favorite qualified charities does not assure receiving the most favorable tax outcome. It is not much more difficult to treat yourself well, and your charities will be totally unaffected. A win/win, to be sure.
Since passage of the Tax Cuts and Jobs Act of 2017 (TCJA), a large group of American taxpayers no longer receive any benefit for itemizing deductions on Form 1040 Income Tax Returns, as they claim the larger Standard Deduction. Coupled with inflation and a down economy in 2022, charities are concerned that donations will not meet their operational needs for the year. Through years of income tax rules and the spirit of the Holiday Season, most donations are made and received late in the year.
Making tax-efficient donations requires advance planning in a tax environment that is constantly changing. At this time, some opportunities have expired for 2022. We have no crystal ball to forecast behavior in a Congress that is constantly at odds with each other and reality, so we inform readers while we await legislation. For tax years 2020 and 2021, taxpayers received “above-the-line” deductions for limited cash contributions. This provision expired, but Congress may reinstate it, along with several other expired provisions. This could happen as late as mid-December.
Qualified Charitable Distributions (QCDs) are available to IRA investors who have reached age 70-1/2, whether or not they are required to withdraw monies from their retirement accounts for Required Minimum Distributions (RMD)s. QCD donations are made directly from an IRA to a charity, and do not count as income to the taxpayer. This renders the QCD amount tax-free, and does not affect the charity. While RMD age has moved from 70-1/2 to 72 (with a likely change to 73 if Congress passes SECURE 2.0), QCDs remain available to IRA owners aged 70-1/2 or more.
For taxpayers subject to RMD requirements, all QCDs are limited to the lesser of the RMD total or $100,000 annually. This tax-efficient methodology requires advance planning to assure timely completion, and is tax-free. While the QCD is the most advantageous method for making charitable contributions, not everyone is qualified to use the technique. Taxpayers under 70-1/2 at year-end should watch carefully to see if the $600 cash donation income exclusion gets restored for 2022. This Blog will update readers when any changes are made.
In years past, many taxpayers used itemized deductions, which effectively reduced Taxable Income by the amount of qualified charitable gifts. Today, however, most of those deductions have been lost in favor of higher Standard Deductions. Using a QCD, your charitable gift is sent directly from your custodian to the qualified charity. It is not reportable income to you, and no tax is due. Note that the taxpayer is responsible for informing a tax preparer that a QCD was used.
Among tax considerations making their way through Congress is a change to the limits on “SALT” deductions, meaning State and Local Taxes. Should an increase in SALT deductions be implemented for 2022, some taxpayers may reap a benefit for larger charitable contributions by itemizing. In an ideal world, we would know the tax rules when the year begins. In today’s America, we hope that we will get the rules in time to perform some simple calculations and estimates before year-end.
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