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The End Of The Year Is Approaching. How Will Charitable Giving Affect Your Taxes?

Keith Srakocic
Associated Press file
This Feb. 13, 2019, file photo shows multiple forms printed from the Internal Revenue Service web page that are used for 2018 U.S. federal tax returns in Zelienople, Pa.

The end of the year is not far away now and, with it, the tax year for most folks comes to an end. You might notice the surge of appeals from charities asking you for your donation. And like many folks, you might still be confused over how to handle donations on your taxes.

HM Payson certified financial planner Molly Reinfried spoke with Weekend All Things Considered host Jennifer Mitchell about year-end taxes.

This interview has been edited for clarity.

Reinfried: Thank you so much for having me. This is a very timely topic. The end of the year is often a last-minute appeal. But also, I think charities are seeing that people are having a little bit more trouble understanding the tax impact of it. So they’re trying to educate as well as ask for more donations.

Mitchell: So what are people confused about? What changed a couple of years ago that maybe they’re still not used to and they need to know about?

The biggest impact here is that the standard deduction has increased. So for most people, that is a good thing on a pure tax basis. But what that means is that more people are using the standard deduction instead of itemizing, which is the alternative. So just to give you a sense of things, 30% of households would itemize their deductions. Now, approximately only 10% itemize. And when people think of charitable deductions for tax purposes, that happens on an itemized deduction schedule.

The standard deduction now is $24,400 for a married couple, and $12,200 for a single person, so you have to give in excess of that in order to have a tax impact. Now, charitable deductions aren’t the only things that you itemize. There’s also medical expenses, there’s real estate taxes, income taxes. So there are other pieces in there, but there are also limitations within that. So there are new ways that people are looking at charitable giving, which require more planning, but to make sure you’re getting the tax impact, as well as the charitable intent.

What are some of those options that you might recommend to somebody?

I think one of the top recommendations we’re seeing that’s really helpful now, and this is relatively new that you can do this within the last two or three years is — well that’s not true, it’s not new, it’s that the Congress has finally said that you’re allowed to do this going forward. They’re called qualified charitable distributions. So you are giving money directly from your retirement account to a charity. So individual retirement accounts, IRAs, when you turn 70 1/2, you have a required minimum distribution you have to take from that account, and that distribution is 100% taxable. So now what you can do is you can give money directly from your IRA to a charity, and never have to recognize that income. So even though it’s not a “deduction,” you’re avoiding income tax by giving that way.

The other way that’s really helpful is what people are calling bunching gifts. So for example, you give $50,000 in one year, through a donor advised fund or directly to a charity, but then let them know this is going to cover my typical annual gifts of $10,000 a year for the next five years. That’s how you’re going to maximize that itemized deduction to charity in order to make sure you’re getting the biggest tax impact.

And some people, what they’re doing is a little bit more complicated, but it’s using private foundations as a way to get money out of their state to avoid estate taxes, and also get some of the charitable deductions within a given year.

I’m going to guess that some folks have resolutions also that they mean to keep regarding finances and being organized. And so what’s the to do list for someone who wants to have a more organized 2020?

What I really like to recommend is, it’s great to set goals of budgeting, but often really hard to meet those goals. So if you look back at your past year, get a sense of in total, how much did you save? How much did you spend? Where are you spending your money? Does that align with your values and where you think you want your money to be going? By analyzing your behaviors for the past year, you’re going to set yourself up to be making better decisions going forward.

The other lists that I would look at would be thinking about, are your estate planning documents up to date, your wills, powers of attorney, health care proxies. Are their insurance coverages that you’ve been meaning to review or get? And checking those beneficiary designations on retirement accounts. And really, there’s always going to be a list. What’s most important is prioritizing that list. And if you get the entire list great, if not, you’re able to work on the things that are most important first.