When you are calculating the amount of tax you owe the federal government, you sum up all of your income sources and deduct either an itemized deduction amount or the standard deduction, whichever is higher.
The itemized deduction amount is the sum of medical expenses above 7.5% of your income, charitable contributions, mortgage interest, and state taxes.
For the 2018 tax year, the standard deduction increase significantly compared to 2017 to the following:
$12,200 for single filers
$24,400 for married filers filing jointly
$18,350 for heads of household.
$1,650 additional for individuals 65 or older
Many people do not have enough itemized deductions to make the itemized deduction greater than the standard deduction.
If one does not itemize they do not receive any tax credit for their charitable contributions. There are two options to get credit for charitable contributions.
RMD for Charitable Contributions
When you are 70.5 and older, each year you need to take a Required Minimum Distribution (RMD) annually. The RMD is a percentage of the value of your IRAs on December 31 of the year before and your age. The percentage goes up as you age. The percentage is about 3.65% at age 70.5 and increased each year to about 15.87% at age 100.
There is a 50% penalty, if you do not distribute your RMD amount from your IRAs. When you take your RMD you can withhold federal and state taxes. The remainder can be distributed to a taxable account. You are taxed on the entire RMD amount as regular income.
You have the option of distributing any part, or all, of your RMD directly to charitable (501c3) organizations. The amount that goes to charities is not taxed. This allows you to reduce your taxable income by the amount of your RMD that you send to charities.
In the case where you do not have enough deductions to meet the standard deduction amount, but you will with your charitable contributions. It will be better to make your charitable contributions from your RMD, because all of charitable contribution amount from an RMD is deductible.
Donor Advised Funds
In any year, you can contribute to a Donor Advised Fund. The contribution goes into an account that you have control over investing and you can distribute to charitable organizations (501c3) over the next several years.
The advantage is that you get the charitable deduction in the year you make the contribution but you can make the donations over many years. Once you make the contribution, the assets are not in your estate. They are considered donated.
This can be a good opportunity to invest in-line with your values using Sustainable, Responsible, Impact Investing. The assets will be good and growing until they are distributed.
By donating several years of donations in one year, you may be able to itemize deductions and pay less taxes.