Tips to Maximize Your Charitable Deductions

​You might be surprised to learn that tax laws passed by congress are not just drafted to collect taxes. A component of tax legislation encourages certain behaviors that congress considers good for society. For example, mortgage interest is deductible to promote home ownership, and charita​ble donations are deductible to encourage philanthropy.

In 2019, many taxpayers were surprised to learn they could no longer write off many of the deductions they took previously, including mortgage interest and charitable contributions. This was because, in 2018, congress changed the rules and increased the standard deduction from $12,000 to $24,000 for married couples. It just made sense for most of us to take the new, larger standard deduction instead of itemizing.

The result of this change was the percentage of Americans who were able to itemize their deductions went from 30% down to only 10%. Many schools and other nonprofits saw a reduction in donations.

Fast forward to 2020. To encourage Americans to give more during the pandemic, congress eased some of the rules. One change allowed taxpayers to write off $300 in charitable deductions, even if they did not itemize. This worked, and contributions of exactly $300 increased 28% on 2020 tax returns.

Also, before the pandemic, the charitable deduction for itemizers was limited to 20% to 60% of their adjusted gross income (depending on the type of donation and charity). This amount was increased to 100% of their adjusted gross income under the CARES Act of March 2020.

Unfortunately, these temporary tax breaks are expiring, leaving many of us to wonder if it is still possible to deduct charitable deductions.

Fortunately, most tax rules contain exceptions or legal loopholes that savvy taxpayers can utilize as part of their tax planning. Here are some suggestions that will allow you to deduct charitable donations and save on your income taxes over the next few years.

Bunching Deductions

Although some expenses are still deductible, the standard deduction of $25,900 is often higher than the amount if you add up all of the allowable deductions. Hence, there is no need to itemize.

However, if you decide to "bunch" deductions in a single year, you time your expenditures and donations to make them higher than the standard deduction amount. This change in timing allows you to write off your deductions and reduce your taxes.

There are different ways to bunch your deductions. A simple example is that if you give $5,000 a year to a charity, you may decide to make a one-time donation this year of $25,000 instead and do that once every five years. You can now itemize and significantly reduce your tax bill when you combine the $25,000 donation with your other deductions, like mortgage interest and taxes. You can also make a much bigger impact with your more considerable contribution. Don't forget to add your other smaller annual donations, non-cash contributions, and volunteer expenses when taking the charitable deduction.

If you want to add to your tax savings, you can bunch your medical and charitable deductions. Medical expenses are generally limited to over 7.5% of your adjusted gross income, so most taxpayers do not have enough expenses to take a deduction. (Look on line 11 of your Form 1040 to find your adjusted gross income.)

But suppose you are planning to have a costly medical procedure. In that case, you may also decide to hire home health care, which is a deductible medical expense, while you recuperate. In the same year, you could have deductible dental work you have put off, perhaps put in a therapy pool or safety equipment, and buy new prescription glasses for your medical expenses to reach the threshold. Combine your medical expenses with your charitable and other deductions, and you have made previously non-deductible expenses deductible.

If you are also planning on downsizing, you can also combine your significant non-cash charitable contributions (like clothing, furniture, and household items) with your more substantial cash donation to increase your total itemized deductions.

The bottom line is to combine as many tax-deductible moves within a single year. Speak with your tax professional about how bunching can help your tax bill.

Also, don't despair if all this planning does not fit your situation. You can make a couple of other moves if you want to save on income taxes while making a difference.

First, if you are 70 ½ or older, you can still do a Qualified Charitable Distribution (QCD) of up to $100,000 from your IRA. Since the funds you contribute from your IRA are not includable in income, the QCD is also not deductible. Therefore, you are not required to itemize and can still take the full standard deduction.

If you have a business and it is a C-Corporation, you can still deduct charitable contributions up to 10% of the corporation's net income. For example, if your corporation net $100,000, you can deduct up to $10,000 in charitable donations.

Of course, if you really want to make an impact, it is always a great idea to leave your favorite school or nonprofit in your will or trust. This is called a charitable bequest. The gift planning director of your favorite charity can provide you with more information on how larger gifts may provide other tax and financial advantages. To make a charitable bequest or major gift to RCC, contact executive director Launa Wilson.

With the top combined federal and California rates topping almost 50%, it makes sense to do what we can to reduce our income taxes while helping future generations.