It’s time to think about year-end tax planning! If you’re planning your taxes after the year is over, then you’re way too late. The only time to plan is during the year.
Like right NOW.
One way to pick up deductions even if you don’t have a business is with charitable donations. And like everything else tax-based, there are strategies.
Make Sure Your Charitable Donation is Deductible
In order to take a deduction for a charitable donation, the payment needs to be made to a recognized nonprofit. That means they have 501 c 3 status from the IRS. Some states, such as CA, also require a filing with the state, if it operates within the state.
One question that seems to come up frequently is regarding donations of food, clothing, money and other items to organization or individuals that don’t have 501 c 3 status.
Is it deductible? No.
You need to contribute to a recognized charity in order to get the deduction. Get a receipt for payments you’ve made. The receipts should include the IRS number for the charity and indicate whether you received anything of value in exchange for the donation. For example, if you donated something for a dinner, the value of the meal you received would not be a deductible part of your donation.
Likewise if you make a donation to a foreign charity that is not recognized in the US, you cannot take a deduction.
If you make a like-kind donation, such as household items, clothes or even a car, the charity will not put a value on the item. That’s up to you to substantiate and/or get an appraisal if necessary.
2021 Charitable Donations
In 2021, just like with 2020, we have a unique opportunity to take a write off for charitable contributions both “above the line” and “below the line.” An above the line deduction means that this is a deduction for purposes of adjusted gross income. And it gives non-itemizers the opportunity to take a deduction. For 2021, nonitemizers can write off up to $300 (single) or $600 (married filing jointly) in charitable cash contributions.
Itemizers can take the above the line deduction plus still take a regular itemized deduction on Schedule A. Normally the itemized deduction is limited to 60% of AGI. This has been suspended for 2021. You get a full 100% of deduction for charitable donations.
NOTE: Ever so often someone asks me if it’s true that you have a choice of either paying the IRS or donating to a charity. That’s not how it works. The charitable deduction reduces your taxable income. It’s not a tax credit (which reduces your taxes) but a tax deduction. Eventually it does mean less tax, but it’s not a dollar-for-dollar deduction.
C Corporations normally are allowed a charitable donation of 10% of taxable income. (Additional charitable donations are rolled forward) For 2021, though, the threshold has been raised to 25% of taxable income.
Is it Time to Bundle Your Itemized Deductions?
Beginning in 2018, the standard deduction was increased and itemized deductions were decreased. For example, you no longer have most miscellaneous deductions and the deduction for state and local taxes is limited to $10,000 per year.
That means less people itemize their deductions. Some things, though, like charitable donations continue to be something many taxpayers want to do and, at the same time, receive a deduction.
One strategy is to bundle itemized deductions by timing payments so that you have more every other year. Those are the years when you itemize your deductions. And then on the light years, you take the standard deduction. That is called bundling.
Gifting Appreciated Items
If you have an item that has appreciated such as crypto or stocks, rather than selling it, paying taxes and then contributing the rest, try this strategy.
Contribute the appreciated item. You will receive a charitable donation deduction based on the current fair market value.
The non-profit steps into your shoes with basis, so there is theoretically a gain when the item is sold. But because it’s a non-profit the gain is not taxable.
By letting the charity sell the item, you’ve reduced the taxes, created a bigger charitable donation for yourself and given the charity more cash.
Donating Inventory From Your Business
If you have inventory in your business that you want to donate, you will normally receive the lesser of your basis in the inventory or fair market value. There is an exception if your business operates as a C Corporation.
The C Corporation will receive a deduction of the basis plus half the difference between the current fair market value and the basis.
For example, if the basis is $12,000 and the fair market value is $20,000, the deduction would be $16,000 ($12,000 + ½ * $8,000). If the basis was $6,000 and fair market value was $20,000, the deduction would be $12,000 (limited to twice basis).
Any business can take a deduction for the contribution of “apparently wholesome food.” This standard even allows food that has reached the expiration date or “pull by” date, as long as it appears to still be usable.
The business can take a deduction of 50% of the FMV in case there is no basis (such as with a farmer) or do a calculation as with regular inventory. The difference is that the business doesn’t need to be a C Corporation in order to get that deduction.
There are some strategic opportunities for tax breaks with charitable donations. But you need to take action before year end.
Don’t wait! This is one that could definitely mean you not only save some money but also do good at the same time.