Not long ago, I highlighted two tricks to help lower your tax bill. Since we’ve entered a whole new tax year, I’ll take the risk of sounding like a broken record. It’s worth it to me, if it saves you some money.
Prior to the new tax law, about 30% of all tax filers itemized their deductible expenses. Today, fewer than 10% will itemize. The culprit? The new standard deduction essentially doubled. Your taxes got much, much simpler.
For single filers, the new, bigger standard deduction is about $12,000. For married filers, it jumped all the way up to about $24,000. Think of these as a hurdle.
If the combined total of your property taxes, your state income taxes, your out-of-pocket medical expenses, your mortgage interest, and your charitable donations doesn’t exceed the new, bigger standard deduction, you can now skip the tedious record-keeping.
But, remember, If you are no longer itemizing, your charitable donations won’t be tax deductible either. That is, unless you use one of these two tricks to preserve your deduction!
The first trick only works if you are over age 70 ½ and have an IRA. If you aren’t yet lucky enough to be over age 70 ½, the second trick is made for you.
If you are older than 70.5, you can donate to a charity directly from your IRA. These are known as “qualified charitable distributions” and they work to satisfy, in part or in whole, your annual required minimum distribution (RMD) from your IRA. Even better, the money you give directly to charity from your IRA won’t count as taxable income. Since you are giving away money that’s never been taxed, it’s just like getting a tax deduction.
The mechanics are extremely easy. Many brokerage firms will simply issue you a checkbook for your IRA. All you have to do is keep a record of the donations you make from that dedicated checkbook. Just be sure to report your gifts to your tax preparer or else you’ll end up paying tax on those charitable distributions anyway!
If you are under 70.5, you get to use a different trick to claw back your tax break for your charitable giving. In order to deliberately push up your itemized deductions above the new, bigger standard deduction, consider “bunching up” years worth of your charitable donations into a single year.
A great way to bunch up your donations without having to give it all away in one fell swoop is to open up a donor-advised fund. Just like that IRA checkbook for those over 70 ½, your donor-advised fund creates a dedicated pot of money for your future donations.
As I write this, I suspect that too many people are dutifully tallying up all their charitable donations made last year only to find that none are actually tax deductible. Well, as the old saying goes, “Only two things in life are certain; death and taxes.” If you didn’t use either of these tricks last year, there’s always this year.