Charitable Donations Tax Deduction: 2023 Update

The holidays are a time for giving; a time to reflect on the year’s bounty.

Many people use November to start planning their charitable donations. The year’s end is a great time to consider making philanthropy part of your overall financial plan. The last two months of the year are often referred to as “the giving season,” and it can be a critical time for charities that rely on funding from individuals. Many organizations kick-start their annual donation appeals on Giving Tuesday, a global day of giving that follows Black Friday and Cyber Monday in November.

Laura Franz, executive director of TLS Veterans, an Illinois-based nonprofit organization that helps veterans in need, called the donations received during the months of November and December “a godsend” in terms of people’s generosity. She said the yearend charitable donations often help make up for any shortfalls that weren’t covered by grants or other donations throughout the year.

Greater need

The shortfall is acute this year considering the impact the coronavirus continues to have on the economy. Many people who lost jobs are turning to food pantries and other charitable organizations to help make ends meet. At the same time, many groups that normally count on in-person donations, from religious organizations to arts groups, saw their revenue streams cut during lockdown restrictions. 

In addition to helping alleviate these issues, supporting your favorite causes can potentially reduce your tax burden but changes in the tax code affect how charitable donations are counted for tax purposes. Here’s what you need to know about the charitable donations tax deduction.

Charitable contributions for 2023

The Tax Cuts and Jobs Act of 2017 allows donors to take off up to 60% of their adjusted gross income (AGI) from cash donations to certain charities in 2018 through 2025. Thinking of donating stock to charity? For stock donations, it’s 30% of AGI. This includes public charities and private foundations other than nonoperating private foundations. Individuals may carry forward (for five years) any qualifying cash contributions that exceed the 60% ceiling for the tax year of the contribution, according to Sax LLP, a tax advisory firm that works closely with Charity Navigator.

Giving is important, but coordinating your charitable contributions with your overall tax strategy is equally so. One thing to keep in mind: The Internal Revenue Service (IRS) typically announces the annual tax inflation adjustments in October or early November for the following year, so you’ll want to keep this in mind when you plan your charitable giving and other tax decisions.

Whatever your tax situation, here are basic steps to consider as you organize your yearend charitable giving:

• Get a receipt. Donating via cash, check, or credit card is simplest, but ensure you get a formal receipt dated by December 31 in order to claim a charitable contribution deduction, especially if you’re making a yearend charitable donation. Without a receipt, the IRS won’t let you use the donation to offset your taxes. So those coins thrown into an anonymous collection bucket don’t count for deductions. Receipts are also necessary for noncash items like clothing or furniture.
• Check the charity’s policy before you load up the trunk. An important factor to consider when it comes to charitable tax-deduction rules is whether items are in good condition. The IRS doesn’t put a price on the condition of the items, but the charitable organization does. The IRS has other rules for these types of donations too. Many charities stopped taking physical-goods donations at the beginning of the pandemic, but some have started again, so check with the charity before dropping off items.
• Are you sure you’re going to itemize? Although the tax code increased the cash deduction to 60% from 50%, it also raised the hurdle to itemize these deductions. It raised the standard deduction for individuals significantly, so a married couple filing jointly for 2023 is entitled to a $27,700 standard deduction, up $1,800 from 2022. The tax code also limited how much homeowners can deduct for mortgage interest and real estate taxes. There’s a $10,000 combined total deduction limit for income, state, and property taxes. These changes made it harder to have enough charitable contribution deductions to pass the standard deduction threshold in any one year. Sax pointed out that if the individuals of a married couple maximize the $10,000 state and local tax deductions and have no mortgage interest, then the couple would need to make at least $15,900 of charitable contributions in order to itemize.
• Consider bunching donations. “These recent changes cause many people to opt for the standard deduction,” explained Daniel J. Laginess, CPA and managing partner at Creative Financial Solutions. For people who are charitably minded and can afford it, he recommended bunching donations. That means combining two years’ worth of charitable donations into one to reach that threshold, whether it means giving cash or donating stock to charities. Doubling up on those donations every other year could even help the taxpayer possibly slip into a lower tax bracket.
• Qualified charitable distributions (QCD). The Individual Retirement Account (IRA) Charitable Rollover allows retirees to donate up to $100,000 to charitable organizations directly from their IRAs without it counting as taxable income. If a retiree didn’t need the money, they could take a qualified charitable distribution. 

A donor-advised fund is another potential avenue to consider. People who set up these funds can make significant charitable contributions and receive an immediate tax benefit. Once the money is in a fund, donors can recommend how to distribute it, whether right away or over time. Donor-advised funds are much like a charitable savings account where donors can put cash or appreciated stock and potentially forgo the capital gains when they donate.

TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.