Ask Ashley: Year-End Planning, Charitable Giving
View the full transcript below.
Welcome back to the second in a series of three videos we are bringing you this year for your year-end planning. I’m Ashley Madden, the Director of Financial Planning for Hutchinson Family Offices. As we approach this holiday season, let’s say you’re feeling very generous. This could be in the form of charitable donations or gifts to family or friends. As both the CPA and financial planner, I’ve always been a big proponent of incorporating charitable planning into my client’s financial plan.
With inflation and a difficult year with the stock market and the general economy, more Americans are struggling than ever. Nonprofits really need our help if we have the funds to give. However, given changes in tax laws over the past few years, it’s important to make sure you are up to date on the most advantageous way to give whenever possible.
The first major change that happened was the increase in the standard deduction under the Tax Cuts and Jobs Act back in late 2017. This nearly doubled the standard deduction and eliminated or reduced itemized deductions starting in 2018. So many taxpayers who had previously been able to itemize or deduct their charitable donations were no longer able to do so, or at least do so as easily. Now, keep in mind that for 2022, the standard deduction for a married couple over the age of 65 is over $28,000 and compound that by the reduction in what you can now itemize.
So it’s unfortunately difficult for many folks, especially those who are retired, no longer have mortgage interest, or are married to deduct charitable contributions in 2020 and 2021. We received a little bit of relief by being able to take a small deduction in the amounts of around $300 to $600, depending on the situation for charitable deductions directly on your 1040, even if you didn’t itemize. But unfortunately, that went away in 2021, so that’s no longer available as of this year.
One strategy to consider, especially if you’re considering donations and higher amounts, would be to fund a donor-advised fund every few years, allowing you to itemize deductions in the year that you contribute to the donor-advised fund. Then you distribute the funds to the charities from there. You may be able to incorporate this with a larger tax strategy called bunching itemized deductions. You just want to remember that you are taking the deduction on the front end when you fund your donor-advised fund and not trying to deduct the distributions from the fund to charitable organizations at a later date.
You could also consider donating low-cost basis stock in addition to cash gifts or funding a donor-advised fund. Many organizations are set up to receive stock investment gifts as well and can provide you the appropriate tax acknowledgment to make sure the stock gift is picked up for any possible tax deductions correctly.
Another strategy to consider, one that I personally really love for those who are taking distributions from an IRA once retired, is called the qualified charitable distributions or QCD strategy. Now, even though the age for required minimum distributions, often called RMDs, has now changed from age 70.5 to age 72, you can still do QCDs as early as age 70.5.
QCDs are limited to a hundred thousand dollars per year, and you can do a QCD from a regular IRA or even a beneficiary IRA as long as you’re over 70.5. QCDs directly reduce your income on 1040. And for those of you familiar with the 1040 tax return, it shows up as an offset from where your IRA distributions are shown in line 4-A. Then the amount that is shown as taxable IRA distributions is reduced by the amount of the QCD in line 4-B, and then it’ll even have the little letters QCD up above that line 4-B. So that’s how you know you’re doing it correctly.
If you do QCDs, you need to make sure that the contributions are made directly to the charity. You can’t just take your IRA distributions and then pay them from those funds. It really does need to come from the IRA directly to the qualified charitable organization. And also, remember that there isn’t anything indicating QCDs on the 1099 R you get annually for your IRA distributions.
So it’s really important that you understand the strategy and that you’re proactive to ensure that your tax preparer is aware that you did a QCD in any particular year.
So here at the holiday season, or really at any point in the year, you may also be thinking about gifting. The annual gifting limit was raised to $16,000 and 2022, and then again, due to inflation, it will be up to $17,000 for 2023. That gifting limit is per donor per donee. So a married couple can give their married child and his or her spouse up to $64,000 in 2022 under the gift-splitting rules without any reporting.
You want to remember that the gift can include not just cash but investments or property. So for example, let’s say someone wants to sell their house, uh, to their son or daughter, but below fair market value, you know, give them that good family deal. Well, the difference between what the house has sold for and the fair market value needs to be considered for gifting purposes.
Now also, remember, if you pay expenses for someone’s medical expenses or education expenses, for example, and those payments are made directly to the educational institution or the medical facility, those are not considered gifts, but they need to be made directly.
So like everything else in the tax realm, the rules can be complicated. Just tread lightly and get expert advice to make sure you’re transferring money to loved ones in the most advantageous way possible and that you report any transfers for tax purposes that are required.
I hope you’ve enjoyed this video.
Please remember this is just general tax advice and everyone’s situation is unique.
You want to seek specific tax advice or do your own research to ensure that you implement the right plan for you.
And please feel free to send me feedback, questions or suggestions for future video content to Ashley@hutchinsonfamilyoffice.com.
We’ll send out the third video soon on tax deduction ideas for individuals and those with self-employment income. So keep an eye open for that.
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