When not to itemize charitable donations

In taxes, “measure twice, cut once,” means taxpayers shouldn’t just think about taxes in April when there is very little they can do to influence their tax outcome, but plan year round. End-of-year tax planning becomes especially important because time is running out to impact their situation for the year. There are some relatively easy decisions to make, like using up all the funds in a use-it-or-lose-it flexible spending account (FSA). But some tax planning is more complicated and requires more time not just to decide what to do but also to execute the decision.

For example, taxpayers generally maximize their charitable donations at the end of the year. If they itemize, a taxpayer with a marginal tax rate of 25 percent could save $25 in taxes for every eligible $100 donation.

“Itemizing charitable donations is a common strategy to reduce taxable income, but there could be some better ways to get a tax benefit for your charitable donations,” said Nathan Rigney, senior tax research analyst at The Tax Institute at H&R Block.

Rigney identified two scenarios where there could be a more advantageous way to donate to charity, impacting retirees and investors.

Qualified charitable distributions give retirees options

Retirees face special circumstances when they make charitable donations. Retirees often do not have enough expenses to make itemizing worthwhile; for example, if their mortgage is paid off, they don’t have mortgage interest to deduct. If they’re not itemizing, there is no tax benefit for their charitable donations. And even if they do itemize, all they are doing is lowering their taxable income.

However, if the retiree makes a qualified charitable distribution from their individual retirement account (IRA) to a charity, they can lower their adjusted gross income (AGI), which, in turn, lowers the amount of Social Security subject to tax and their taxable income. It also counts toward their required minimum distribution.

Retirees who are at least 70½ should consider this qualified charitable distribution option, which is a trustee-to-trustee transfer to a qualified charity of some or all of their required minimum distributions from an IRA. The maximum distribution they may make to a charity is $100,000.

Investors with appreciated stock may use a better strategy than itemizing donations

Investors can avoid paying capital gains tax on stock by contributing appreciated stock to a qualified charity directly rather than selling the appreciated stock and then making a cash charitable contribution.

“It is important to start planning to contribute appreciated stock or make a qualified charitable distribution before the end of the year,” said Rigney. “Unlike traditional charitable donations, where you only have to postmark the check in the mail by the end of the year, there are extra steps to making these kinds of contributions. You will need to work with your financial institution which may require additional time and paperwork than just writing a check and dropping it in the mail, or making an online payment.”

Taxpayers can learn more about qualified charitable distributions and donating appreciated property online. For information on their specific circumstances, they should talk to a qualified tax professional.