A great injustice of the federal tax code is that many taxpayers are unable to deduct their charitable contributions.
This injustice is a dirty little secret few people know, but charitable donations are tax deductible only if you itemize your deductions.
Taxpayers who make charitable contributions deduct those contributions on Schedule A.
The Schedule A form is for taxpayers to list their deductions like state income tax, property tax, mortgage interest and more. This is called itemizing deductions.
After totaling all of these “deductible” expenses on the schedule A, taxpayers then compare their itemized deductions to the standard deduction.
If their itemized deductions are less than the standard deduction, then taxpayers use the standard deduction, nullifying the tax benefit for making the charitable contribution.
In 2018 the married filing joint standard deduction is $24,000; the single filing standard deduction is $12,000. For those who file head of household, the standard deduction is $18,000.
Taxpayers who make charitable contributions and don’t reap the benefit because they don’t itemize may have another option. Some taxpayers can make donations directly from their IRA to a charity.
Generally, when money leaves an IRA, it is taxable income.
You will get a 1099R at the end of the year and pay tax on that money just as if it was earned at a job. The rule is different if you contribute directly to a charity.
The IRS allows taxpayers to make contributions from an IRA to a charity and that money will not be taxed. Instead of taking the deduction on a schedule A, you just get to report less income on the tax return.
This is much more beneficial than making those contributions from your checking account.
Reporting less income can be more advantageous than taking the deduction on Schedule A.
Even if you itemize and can deduct your charitable contributions on a schedule A, you still may want to consider making contributions from your IRA.
Making charitable contributions from your IRA will lower your Adjusted Gross Income. Reducing your income before deductions can have several positive effects.
Deductions can be either above the line or below the line.
Above the line deductions, lower income before adjusted gross income is calculated. Below the line deductions reduce income after your adjusted gross income is calculated.
Above the line, deductions are more valuable than below the line deductions for several reasons.
Probably the most common benefit of having less income is having less Social Security included in income.
Social Security is included in income on a sliding scale. Some Social Security recipients have an income low enough to not have any of their Social Security included in income.
Other benefits of lowering your adjusted gross income may include qualifying for government and other income-based benefits.
Healthcare, tuition help, tax breaks and welfare are some of the benefits that can open up by having a lower income.
If you think this may be beneficial, discuss this option with a tax professional.