As tax season comes into full view a lot of people have tax deductible donations on their minds. While it may be too late to make a charitable contribution that counts against your 2021 taxable income, plenty of time remains to do so for 2022.
Charitable donations are a great way to rein in the value of your estate and stretch your retirement savings and so it is important to understand how they work. Just as important, however, is understanding how to design a tax deductible donation so that it achieves maximum effect. After all, a charitable donation is not just about taxes but about giving back and so you of course want to know your generosity is put to good use.
What Is a Charitable Tax Deduction?
A charitable tax deduction is a tax planning strategy that allows you to reduce your taxable income by making a charitable contribution to a qualifying organization.
The CARES Act allows individual 2021 taxpayers to deduct up to $300 (or $600 for a married couple filing jointly) for monetary charitable donations. Only cash donations qualify and deductions need not be itemized; however, in 2022 this special provision will no longer apply.
Next year, all charitable tax deductions will once again need to be itemized which means any qualifying donation must be recognized by a letter from the charity that contains the organization’s name, amount, and contribution date.
Itemized charitable donations will be able to be claimed up to an amount of 60% of your adjusted gross income (down from the 100% permitted by the CARES act).
What Role do Charitable Contributions Play in Estate Planning?
Donating assets to charity is a powerful estate planning tool. Not only can doing so reduce the value of your estate and help you avoid hefty estate and capital gains taxes, but it can also help you stretch your retirement savings allowing you to eventually pass more on to loved ones.
Charitable bequests made in a will or trust can help to bring the value of your estate under federal and state tax-exempted amounts. With the federal estate tax exemption at just over $12 million for individuals, this may seem like only a concern for the extremely wealthy, and yet often state estate tax exemptions are much lower. While Missouri has no estate tax, Illinois, for instance, taxes any estate valued at over $4 million.
Tax deductible donations may also be helpful when you turn 72 and must begin taking required minimum deductions (RMDs) from you’re your IRA. Money received in this form counts toward your taxable income unless you donate it to charity. If you retain other sources of income and want to avoid paying unnecessarily high taxes, turning RMDs into charitable donations is a useful strategy.
Making Sure Your Charitable Contribution Goes to Good Use
People incorporate charitable giving into their estate plan not only to mitigate taxes but to leave a legacy. Unfortunately, this sometimes backfires when restrictions placed on a charitable bequest are too stringent or complex for an organization to honor. Accordingly, it is crucial to seek professional advice when crafting a charitable gift as you want to be sure your generosity is put to effective use.
To learn more tax deductible donations and charitable giving in estate planning, do not hesitate to contact the Polaris Law Group either by calling 636-757-3850 or using the contact form on our webpage.