How Do Tax Accountants Address Charitable Contributions for Tax Deductions?

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    How Do Tax Accountants Address Charitable Contributions for Tax Deductions?

    When it comes to integrating charitable giving into financial planning, our seasoned Financial Planners recommend strategies such as bundling donations for itemized deductions and tailoring giving strategies to each client's unique situation. Alongside expert advice, we've also compiled additional answers that delve into the nuances of maximizing tax benefits through charitable contributions. From the importance of verifying the eligibility of charitable organizations to ensuring proper donation substantiation, explore a spectrum of considerations that can enhance your philanthropic impact within your financial plan.

    • Bundle Donations for Itemized Deductions
    • Tailor Giving Strategies to Client
    • Detail Gifts for Potential Tax Benefits
    • Choose Best Deduction Method Annually
    • Spread Deductions with Carryover Provisions
    • Verify Eligibility of Charitable Organizations
    • Ensure Proper Donation Substantiation

    Bundle Donations for Itemized Deductions

    When we're working with clients who regularly donate to charities, we discuss how bundling multiple years' worth of donations in one tax year could make it possible for them to itemize their tax deductions for that year. For example, if a married couple usually takes the standard deduction and they like to donate $10,000 to charities each year, they could donate three years' worth, or $30,000, in one tax year. Now they have more than the standard deduction for Married Filing Jointly and can also add more to their itemized deductions like mortgage interest and property taxes.

    For clients holding highly appreciated stock in their taxable account, we discuss the benefits of a Donor-Advised Fund (DAF). They can donate shares at their fair market value, seeing the deduction benefit for that tax year. At the same time, they are also removing their future capital gains tax liabilities from the stock. Once the funds are in the Donor-Advised Fund, they can send or grant donations to their charities over several years.

    Lori BodenhamerFinancial Planner, Abundo Wealth

    Tailor Giving Strategies to Client

    I start by determining if the client takes an itemized or standard deduction. If the client itemizes, I tend to recommend donating appreciated stock. This allows the client to avoid ever having to pay capital gains tax on the shares and allows the itemized deduction for the fair market value of the shares.

    If the client is under the threshold but tends to do a lot of giving each year, I might have them set up a Donor-Advised Fund, which allows them to take a deduction in the year of contributing to the fund and distribute donations from that fund each year. If the client is well under the threshold for being able to itemize, I would still have them consider donating appreciated stock to avoid capital gains, even if they can't get the deduction. There are also occasions where it would be more advantageous to donate cash.

    There is no blanket answer for the best strategy for charitable contributions. Each client receives recommendations based on what is most advantageous for that client's situation. For clients who are age 73 or older and have required minimum distributions from tax-deferred retirement accounts (e.g., IRAs, 401(k)s, etc.), I often recommend donating from their retirement account. This is called a Qualified Charitable Distribution (QCD), which reduces the taxable amount of the required minimum distribution.

    Jessica Robertson
    Jessica RobertsonFinancial Planner, South Bay Financial Partners

    Detail Gifts for Potential Tax Benefits

    Tax accountants often encourage taxpayers to detail their charitable gifts when such contributions provide a greater tax benefit than the standard deduction. By itemizing donations on their tax returns, individuals may increase the amount of their deductible expenses. This method typically works best for those who have given generously throughout the year, as the total donations must surpass the standard deduction to be advantageous.

    It's crucial to have all of the donation records organized to ensure the process is smooth. If you've made significant charitable gifts, consider itemizing your deductions and consult a tax accountant for guidance on maximizing your tax savings.

    Choose Best Deduction Method Annually

    When assessing whether to itemize charitable contributions or take the standard deduction, tax accountants recommend using whichever method lowers the tax bill the most. If a taxpayer's charitable giving doesn't surpass the standard deduction threshold, it might be more beneficial to opt for the standard deduction. Each year, these thresholds can change, so it is important to be aware of the current limits.

    A tax accountant can help compare the two options to determine which will provide the greatest financial benefit. If you're unsure about whether to itemize or apply the standard deduction, speak with a tax professional who can evaluate your situation and advise you accordingly.

    Spread Deductions with Carryover Provisions

    In certain situations, tax accountants utilize carryover provisions which allow taxpayers to spread out deductions over several years. This strategy benefits donors who have contributed more than the annual limit for charitable deductions, as the excess can be applied to future tax returns. It's a useful approach for those who intend to continue supporting charities but have reached the maximum deductible amount in a single year.

    This can be quite complex, so having a tax professional explain the specifics is important. Should you find yourself with excess contributions, ask your tax accountant about carryover provisions to take advantage of deductions in coming years.

    Verify Eligibility of Charitable Organizations

    Tax accountants play a pivotal role in verifying that donations are made to eligible organizations for tax deduction purposes. Donations must go to approved charities, as contributions to individuals or non-qualified groups do not count towards tax deductions. Accountants can assist in identifying qualified nonprofits and ensuring that the contributions are made correctly.

    This step prevents disallowed deductions and problems with the IRS. Before making a charitable contribution you intend to deduct, confirm the organization's eligibility with a tax accountant, ensuring your donation has the desired fiscal impact.

    Ensure Proper Donation Substantiation

    Another key responsibility for tax accountants is to inform donors about the importance of substantiation for their charitable contributions. Proper documentation, such as receipts or acknowledgment letters from the charity, is necessary for a donation to be tax-deductible. Without this evidence, the IRS may reject the deduction if audited.

    Accountants remind donors to save all related paperwork and provide instruction on the types of records needed for different kinds of donations. To protect your charitable deductions, be sure to keep meticulous records and check with a tax accountant on how to substantiate your donations.