Since the Tax Cuts and Jobs Act of 2017, there’s been a higher standard deduction, which makes it harder to claim charitable tax breaks, explained Christopher Hoyt, a law professor at the University of Missouri in Kansas City.
Roughly 33% of taxpayers itemized deductions in 2017, compared to fewer than 10% in 2021, said Hoyt, speaking at the American Institute of Certified Public Accountants’ annual conference in Las Vegas on Tuesday.
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For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing together, and there’s no benefit to itemized deductions — including charitable gifts, medical expenses and more — until the combined amount exceeds the standard deduction.
Given these constraints, investors can maximize tax breaks by “bunching gifts,” Hoyt said. “Concentrate your gifts in one year, as opposed to spreading them over several.”
Consider donor-advised funds for ‘bunching’
One popular option for bunching gifts is the so-called donor-advised fund, which provides an upfront tax break while acting like a charitable checking account for future gifts.
Donor-advised funds have exploded since the 2017 tax law change, and more than 75% are less than five years old, according to Hoyt. However, it’s unclear whether they will remain as popular once the increased standard deduction sunsets in 2026.
Typically, the best assets to donate to charity, including donor-advised funds, are profitable investments from a brokerage account because you can bypass capital gains taxes, which results in a bigger gift to charity.
Nearly 60% of 2022 contributions to Fidelity’s donor-advised fund were non-cash assets, such as stocks, and many chose to donate assets with built-in gains, the organization reported.
Shift to individual retirement accounts at 70½
Once you’re age 70½ or older, it’s typically better to donate funds from pre-tax individual retirement accounts, known as qualified charitable distributions or QCDs, Hoyt said.
You can donate up to $100,000 per year from your pre-tax IRA, he said, and the “secret sauce” is that QCDs can satisfy your required minimum distributions.
“The big winners are donors who take the standard deduction,” Hoyt said, because QCDs don’t count as income, which can penalize seniors through higher Medicare Part B and Part D premiums.
To qualify, you must transfer the money directly from an IRA to an eligible charity and get a confirmation from the organization that you received no benefit in exchange, he said.