In 2022, nearly $500 billion was donated to US charities. Most charitable giving isn’t motivated by the tax benefits, but these benefits exist…and they can have a real impact!

Today I’ll explore some ways charitable giving can reduce your taxes.

The charitable tax hurdle

Most charitable giving during the year is reported on Schedule A of your tax return. This form is used to determine the total amount of a variety of “itemizable” deductions, including state medical costs, income taxes, property taxes, mortgage interest, and charitable giving.

The total amount of all these Schedule A itemized deductions is compared to your standard deduction. The standard deduction is an automatic reduction of your adjusted gross income, or AGI.

For non-retired married filing jointly couples in 2024, the standard deduction is $29,200. If your itemized deductions exceed your standard deduction, then your AGI can be reduced further, lowering your taxes more. If your itemized deductions are less, then you still receive the standard deduction.

Example: Above is a picture of Mark and Debbie’s Schedule A. They have a few modest itemized deductions, but they give 10% of their annual income ($16,500) to their church. Even though they donate a significant amount of income, their Total Itemized Deductions do not exceed their standard deduction, therefore their AGI is only reduced by their standard deduction amount of $29,200 (see Line 12a in the image below).

If Mark and Debbie plan to give in this way year after year, their itemized deduction will never exceed their standard deduction, and thus they’ll never receive any additional tax benefit for their charitable giving.

While giving to charity certainly isn’t throwing one’s money away, from a tax standpoint, Mark and Debbie’s current giving plan has no added tax benefit.

“Bunching” Charitable Donations to Reduce Taxes

What can Mark and Debbie do differently to reduce their taxes? One strategy to consider is “bunching” their charitable giving. Instead of giving the same amount year after year and never exceeding the standard deduction, Mark and Debbie could pay extra in Year 1, and skip their giving the following year. IRS rules allow you to donate cash of up to 60% of your AGI per year.

Example: Mark and Debbie decide to “bunch” all 2024 and 2025 charitable giving into the 2024 tax year. They will donate $33,000 and skip their charitable giving in 2025. This results in “Total Itemized Deductions” of $35,703 which exceeds their standard deduction by about $6,500, lowering their total taxes paid by an extra $1,400 in 2024. In 2025, they’ll have no charitable giving to report, but they’ll still receive the standard deduction.

If Mark and Debbie want to receive this charitable deduction but don’t want all of the funds to go to their preferred charity right away, they could also use a donor advised fund, a topic I’ll explore in a future post.

MAKING “QUALIFIED CHARITABLE DISTRIBUTIONS” from retirement accounts to reduce taxes

Giving cash donations isn’t the only way to support your favorite charity, in fact it’s one of the least tax-efficient ways to do so, since cash is after-tax dollars. Another way is to donate directly from your tax-deferred retirement account.

Retirees with tax-deferred accounts like Rollover IRAs and Traditional IRAs will eventually be required to take withdrawals from these accounts. It’s Uncle Sam’s way of saying: “You’ve delayed paying taxes on this money long enough, time to start paying up.” Any regular withdrawal from these accounts will owe federal income taxes.

These withdrawals, called required minimum distributions or RMDs, typically begin at age 72. However, the IRS allows you to direct some or all of this RMD to your favorite charity of choice–and as long as the funds go directly to the charity, you’ll avoid all taxes owed.

Example: Mark has reached his RMD age. Instead of using cash that has already been taxed to make a donation to his church, he donates part of his RMD from his Rollover IRA. If Mark’s RMD was $20,000 and he used $16,500 to make a donation to his church, Mark would have income from his Rollover IRA of just $3,500, on which he would owe income taxes. The $16,500 would be marked as a qualified charitable distribution, or “QCD”, for tax purposes. Note that since Mark already received a tax deduction for this donation, the $16,500 is not recorded on his Schedule A (this would be double counting). Assuming Mark is in the 22% marginal tax bracket, the taxes owed on his RMD would be reduced by $4,070!

As an added bonus, IRS rules also allow QCDs from tax-deferred retirement accounts as early as age 70 ½, so there’s no need to wait until your RMDs begin.

Planning Implications for Wyoming Residents

What are the implications of these charitable giving opportunities for Wyoming citizens? For starters, Wyoming has no state income tax. This tax is allowed to be itemized on your Schedule A, but since we don’t pay it, Wyoming residents may have a harder time surpassing the standard deduction. In this case, bunching charitable donations can make sense.

The standard deduction was doubled with the Tax Cuts & Jobs Act of 2017. This provision “sunsets” in 2026, meaning if Congress doesn’t extend it next year, then the standard deduction gets cut in half. This means more opportunities to itemize will make sense since the bar will be lower, but for Wyomingites who are less charitably inclined, their taxes may end up increasing because of the standard deduction decrease.

Many Wyoming clients I work with are land owners, and it’s important to remember that personal property can also be donated to charities, up to a 30% AGI limit per year. For example, if your AGI is $100,000 and you donate a $40,000 plot of land, you’ll receive a charitable deduction of $30,000 in that year. The remaining $10,000 is carried over to future years for up to 5 years. This donor might otherwise owe capital gains taxes if the land was sold, but since it was donated, there is no capital gains tax for him, or the charity that receives it.