Looking back at your 2023 income tax return, you might be considering what you could have done differently to lower your tax liability. As we approach the end of 2024, now is the ideal time to ensure you’re taking full advantage of tax-saving strategies like Retirement Contributions and Charitable Donations.
What Are Charitable Tax Deductions?
Charitable tax deductions are benefits you get for donating to qualifying nonprofits. When you give money or property to an IRS-recognized nonprofit, you can deduct the donation’s value from your taxable income, if you itemize your deductions.
The IRS allows deductions for contributions to 501(c)(3) organizations, including most charities, religious groups, educational institutions, and certain other nonprofits. Remember, you can only deduct these donations if you itemize; taking the standard deduction means your charitable donations won’t affect your taxes.
Charitable Tax Deduction Limits
If you itemize, the IRS limits how much you can deduct. Typically, you can deduct 20% to 60% of your adjusted gross income (AGI), depending on the type of donation. For example, if your AGI is $60,000, you can deduct up to $36,000 in charitable contributions. If your donations exceed this limit, you can carry over the excess to the next five years.
However, you cannot donate to individuals and receive a tax deduction. While options like GoFundMe have a great impact to those in need, those donations are not charitable contributions. Also, charitable contributions can reduce your income tax burden within the calendar year they are made (January 1st – December 31st).
Key Takeaways:
- The first step is to check if you qualify for tax benefits from your donations. Most people claim the standard
deduction, which reduces their tax bill by a set amount. To get the most out of your donations, think about your tax situation and how it might fluctuate between years. - Personal property such as clothes, art, or stocks donated to qualified organizations can be deducted at their market value when donated.
- For donations of money or property over $250, you need a receipt or written acknowledgment to claim the tax deduction. Organizations must provide a receipt for donations of $75 or more.
- Businesses can lower their tax bill by making charitable donations through contributions made by check, credit card, or electronic transfer to IRS-recognized charities as well as donating office supplies, food or product inventory.
- Keep records of all donations. If your donations exceed the annual limit, you can carry over the excess to the next five years.
Understanding Retirement Contributions and Tax Benefits
Fortunately, saving for your future retirement can actually help you lower your tax bill today. When you put money into an eligible retirement account, it reduces the income you have to pay taxes on. By allocating a portion of your income to a qualified account, like the ones your employer offers, you can lower your taxable income because those contributions are made pre-tax. Plus, any earnings on your investments in that account won’t be taxed until you take them out at retirement. If you’re in a lower tax bracket when you retire, you could end up paying less tax on those withdrawals.
However, keep in mind that some retirement savings options, like a Roth IRA or Roth account in your retirement plan, work a bit differently. Contributions to these accounts are made with money that’s already been taxed, so they won’t reduce your taxable income now. But the upside is, when you withdraw the money in retirement, you won’t be taxed on those withdrawals or the investment earnings (as long as you’ve had the account for at least 5 years and you’re 59½ or older). It’s a trade-off: paying taxes now so you can enjoy tax-free withdrawals later.
Key Takeaways:
- Familiarize yourself with Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs.
- Use pre-tax contributions for accounts like Traditional IRAs and 401(k)s to lower your taxable income.
- Roth IRAs offer tax-free growth, so you pay taxes now but not on withdrawals in retirement.
- Take full advantage of employer matching contributions to your 401(k).
- Be aware of the annual contribution limits and aim to maximize them each year.
In today’s economy, many people seek the best strategies to save on taxes, especially when contributing to charities or saving for retirement. The IRS offers helpful tools and resources to understand contributions, deductions, limits, and nuances. However, it can be complex and confusing to navigate all the legalities and rules. That’s why many engage in the expertise of Jeanine Hemingway, CPA. We’re here to answer your questions, guide you towards the best outcomes, and help lower your tax burden.
