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When you file a return, you reduce your taxable income by deducting the greater of either the standard deduction or your total itemized deductions, which may include charitable donations.
Signed in 2017, former president Donald TrumpThe subscription tax overhaul nearly doubled the standard deduction, making subscribers less likely to itemize.
In 2022, the standard deduction is $12,950 for individual filers, or $25,900 for married couples filing jointly. And if you take the standard deduction in 2022, you can’t claim an itemized deduction for charitable gifts.
If you plan to itemize deductions, your charitable deduction depends on the type of asset you’re donating.
Juan Ross, CFP at Forum Financial Management in Thousand Oaks, Calif., said that income investing in a taxable brokerage account “is generally the best type of asset.”
Here’s why: By donating an appreciated asset, you’ll get a charitable deduction equal to the fair market value while avoiding the capital gains taxes you’d otherwise have to collect on the sale, he said.
Of course, you’ll want to confirm that your charity can accept non-cash donations.
Since most portfolios are down 15-25% for the year, it can be tempting to offload stocks that have fallen in value. But it is better to sell these assets, collect losses and donate cash to charity, Ross said.
If you’re 70½ or older, donating directly from a traditional individual retirement account “is usually the best way to donate,” said Mitchell Krause, CFP and owner of Capital Intelligence Associates in Santa Monica, California.
A strategy known as “qualified charitable distribution,” or QCD, involves a direct transfer from an IRA to an acceptable charity. You can give up to $100,000 a year and it can be considered yours minimum distribution required if you transfer money at age 72.
Because the donation isn’t reported as income, you’ll still get a tax break even if you don’t itemize deductions, Kraus said. Reducing your adjusted gross income can help avoid other tax problems, such as higher Medicare Part B and Part D premiums.