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Individual Tax Implications of Charitable Contributions

People support charitable organizations for a variety of reasons: they believe strongly in the organization’s mission, they’re an alumnus of a school, a business associate or a friend has asked for support, etc.

Tax deductions may also be part of the decision to make charitable contributions.

If you itemize deductions on your individual return, you can deduct contributions to qualified charities in an amount up to 100% of your Adjusted Gross Income (AGI). Even if you don’t itemize deductions, and use the standard deduction on your return, you may still reduce your taxes when you make contributions. For 2020, individuals who didn’t itemize deductions were allowed to deduct up to $300 of charitable contributions. In 2021, this $300 deduction is also allowed, and the limit is increased to $600 on a joint return.

Standard deduction amounts allowed on state returns are different from the amounts allowed on federal returns. Taxpayers who use the standard deduction on their federal tax return may still be able to itemize deductions, including charitable contributions, on their state return.

Older taxpayers who must withdraw Required Minimum Distributions (RMD) from IRAs may distribute up to $100,000 directly from the IRA to a qualified charity. The distributions must be made directly from the trustee to the qualified charity. These distributions will not be deductible as itemized deductions, but will reduce the RMD for the taxpayer, and will also reduce the taxpayer’s AGI. This can be important because the amount of AGI is the starting point for computing certain deductions, credits and other tax benefits that are limited by income. Reducing AGI could increase other applicable tax benefits. If you have plans to make charitable contributions, and you must take an RMD, it may make sense to contribute directly from your IRA. It won’t cost you any more money, and the tax benefits could be valuable.  Please contact your trusted TBC advisor for more information.

By: Katharine K. Doran, CPA, Shareholder