If you're someone who donates regularly to charitable organizations, it's good to know more about the tax benefits that come with it. For instance, how charitable tax deductions can help reduce your taxable income and save you money on your tax bill, while also allowing you to support causes that are most important to you. However, tax laws surrounding charitable donations can be complex and ever-changing, which is why it's crucial to stay informed on the latest rules and regulations.
That’s why we’ve put together this guide with the four most important things you need to know about your 2023 charitable tax deductions, so you can make informed decisions and maximize the tax benefits of giving back.
1. You can deduct up to 60% of your AGI through charitable deductions
The charitable deduction is one of the most generous deductions in the U.S. tax code. You can deduct a substantial portion of your income. In fact, for the 2023 tax year, you can deduct up to 60% of your adjusted gross income (AGI) through charitable deductions.
Another benefit of the charitable deduction is that it allows taxpayers like you to donate more than just cash. You can deduct donations of property, such as clothing or household goods. In addition, you can donate appreciated assets, such as stocks, ETFs, or mutual funds, which allow you to avoid paying capital gains tax on the appreciation and still receive a tax deduction for the full value of the asset. The limit for deducting charitable donations of appreciated assets, such as stock, ETFs, mutual funds, and cryptocurrency is 30% of your AGI.
2. The standard deduction has increased for all filing classes in 2023
For the 2023 tax year, the IRS has increased the standard deduction for all filing classes. For example, if you were married and filing jointly in 2022, you could only deduct $25,900 from your standard return. In 2023, that amount goes up to $27,700.
The downside to this more generous deduction is that it makes it harder to itemize your deductions, and for certain types of deductions, you can only take advantage of them when you itemize. Fortunately, there are now strategies that can help you itemize deductions so that you can take full advantage of your generosity.
|Filing Status||2022 Tax Year||2023 Tax Year|
|Married individuals filing separately||$12,950||$13,850|
|Married individuals filing jointly||$25,900||$27,700|
|Head of household||$19,400||$20,800|
3. You may be missing out on these common and money-saving tax deductions
What can you take a tax deduction for in 2023? The most common tax deductions that people take on their returns include:
- Home mortgage interest can be deducted on up to $750,000 of debt, depending on your filing status.
- Medical and dental expenses that are unreimbursed and are greater than 7.5% of your adjusted gross income.
- Interest from a home equity loan or HELOC, if the funds were used to buy, build, or significantly improve your home.
- State and local taxes on personal property can be deducted up to $10,000.
Once you total up all of your individual deductions, compare that number to the standard deduction that every taxpayer is eligible for. If your itemized deductions are lower than the standard deduction, take the standard deduction to save more money. However, if the total is higher, itemize each individual deduction to save more money on your taxes.
4. You can’t take charitable tax deductions without itemizing
If you're wondering whether you can take charitable tax deductions without itemizing, there's good news and bad news. The bad news is that you can no longer take deductions for charitable donations without itemizing your deductions. The good news is that, as we mentioned earlier, there are strategies to help you itemize your deductions even if you don't have enough charitable contributions to meet the limit. This strategy, called bunching, involves combining multiple years' worth of charitable contributions into a donor-advised fund in a single tax year to surpass the limit and itemize your deductions in 2023.
For instance, if you're a single taxpayer who donates $7,000 to charity each year, you may find that your charitable contributions alone don't exceed the standard deduction threshold of $13,850. However, by bunching two years' worth of contributions in a single tax year, you double your charitable contributions to $14,000, thereby exceeding the threshold. That doesn’t even include common expenses that also qualify for tax deductions, such as mortgage interest and medical expenses.
The great thing about donor-advised funds like Daffy is that it’s easy to bunch charitable contributions. First, contribute the amount you wish to bunch to your Daffy fund and immediately receive a tax deduction for that amount. Then simply distribute the funds to your desired organizations whenever you are ready to give. This way, you can continue to donate $7,000 annually in both 2023 and 2024 by using the funds you set aside in Daffy.
By maximizing your charitable tax deductions, you can reduce your tax bill while also supporting the causes that are most important to you. If you're interested in learning more about how to maximize your charitable tax deductions, be sure to check out our complete Charitable Deductions Tax Guide.
Please note that the information contained on this page is for educational purposes only and should not be considered tax or investment advice. Any calculations are intended to be illustrative and do not reflect all of the potential complexities of individual tax returns. To assess your specific situation, please consult with a tax and/or investment professional.