As we are nearing the end of 2021, it is important to be aware of the current tax law that may impact your tax due when you file your taxes. There are some strategies and areas you might be able to look into in order to create a positive impact on your financial future. One such area that could be beneficial is charitable contributions.
For 2021 tax returns, the standard deduction increases to $12,550 for single, $18,800 for heads of household, and $25,100 for married filing jointly. This has led to most people taking the standard deduction in lieu of itemized deductions. However, taxpayers who tend to be charitably inclined generally itemize deductions rather than take the standard deduction. If the annual amount of itemized deductions does not exceed the standard deduction amount, it might be wise to consider “bunching” charitable contributions. Bunching is the consolidation of donations and other deductions into targeted years. This will allow the taxpayer to itemize deductions in the targeted year and take the standard deduction in the “off” year.
Another option for taxpayers who are charitably inclined is to create a donor advised fund (DAF). This is a fund in which taxpayers can make charitable contributions, receive an immediate tax benefit, and then direct grants from the fund over time to their charity of choice. This way taxpayers get a deduction when the DAF is funded while actual payouts from the fund to charity are deferred to a later time.
Another option relating to charitable deductions is the opportunity to make qualified charitable distributions (QCD). This provision allows taxpayers who are 70 ½ and older to make a QCD in the form of a direct transfer of up to $100,000 directly from their IRA over to a charity. This can include all or part of their Required Minimum Distribution (RMD). The distribution from the IRA is nontaxable and the contribution is not deductible.
Charitable contributions are a great way to reduce your income tax liability. Remember that you need to provide the IRS with receipts upon audit to substantiate the deductions. In addition, be sure to keep track of the value of the items donated to Goodwill and other charities throughout the year.
Please contact Mackenzie Sanders or any member of the Baker Holtz team at 616-458-1835 if you have any questions regarding tax planning for charitable contributions.
Please contact any member of the Baker Holtz team at 616-458-1835 if you have any questions about reducing your annual tax bill.