With the recent 2023 IRS updates due to inflation as well as any personal changes (a new job, home, or medical expense), it’s a smart time to tune up your tax strategy and see how you can maximize your charitable contributions and continue making an impact on the causes and organizations you care about.
To help you navigate the latest IRS tax updates from 2022 to 2023, we’ve put together a guide including the updated tax brackets, charitable deduction limits, how much of a charitable donation is tax-deductible, which assets are best to donate to charity, and much more.
Which tax bracket am I in and how does that impact my deductions?
As part of the Inflation Reduction Act, the IRS released the following tax bracket updates for 2023, which significantly increase the maximum threshold for each level compared to 2022. That means it may be easier for you to qualify for a lower tax rate, particularly with charitable deductions.
Remember that your entire income is not taxed at your maximum tax rate. Each income threshold is taxed at the corresponding tax rate, creating an overall effective tax rate. If you’re a single filer, your first $11,000 of earned income will only be taxed at 10%, regardless of your total earnings.
In addition to federal taxes, your income is also subject to state taxes, unless you live in one of the nine states that don’t charge income tax. In California, for instance, the highest bracket for single filers earning $1 million or more and married couples earning $2 million or more is 13.3%.
|2023 Federal Tax Rate||Single||Married Filing Jointly|
|10%||$11,000 or less||$22,000 or less|
|12%||Over $11,000||Over $22,000|
|22%||Over $44,725||Over $89,450|
|24%||Over $95,375||Over $190,750|
|32%||Over $182,100||Over $364,200|
|35%||Over $231,250||Over $462,500|
|37%||Over $578,125||Over $693,750|
What are the standard tax deductions for 2023?
Another key component to consider as part of your tax strategy is deductions, which apply to all tax brackets.
Here are the 2023 standard deductions compared to the 2022 tax year:
|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|
While increased standard deductions mean lower taxable income for many taxpayers, it also means you must surpass a higher threshold to itemize your deductions. However, there is a tax strategy called “Bunching” that many people use to lower their tax bill with charitable deductions, which you’ll learn more about below.
What are the charitable contribution limits?
Charitable giving tax deduction limits are set by the IRS as a percentage of your income. Similar to 2022, cash contributions in 2023 can make up 60% of your AGI. The limit for appreciated assets in 2022 and 2023, including stock, is 30% of your AGI. Contributions must be made to a qualified organization.
Can you take charitable tax deductions without itemizing?
No, unlike the 2021 tax year, in order to take a tax deduction for your charitable contributions in 2023, your total deductions must exceed the standard deduction for your tax filing status. It’s important to understand all of your eligible tax deductions so that you can determine how much extra it would take in charitable contributions to exceed the standard deduction.
What can you take a tax deduction for?
In order to make a charitable donation tax-deductible, you have to itemize your deductions. There are a number of tax deductions you can take in addition to your charitable contributions.
Some of the most common deductions 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 add up all your eligible tax deductions, see how close you are to the standard deduction. Depending on your situation, you may even exceed the limit without charitable contributions. However, don’t forget that charitable donations can be deducted up to 30-60% of your adjusted gross income and are one of the most generous income tax deductions of all.
Either way, any gap between your itemized and standard deduction can help determine what size of a charitable donation you may want to give.
Let’s look at an example of mortgage interest and property taxes, which are two of the most common itemized deductions. Say your current mortgage balance is $750,000 and your 30-year mortgage has a 3.5% interest rate. In your first year of making payments, your interest would total $26,000. On top of that, say your local property tax bill is about $10,000. Your total itemized deductions would be $36,000, which is above the standard deduction for all filing types.
I give to charity regularly but am not hitting the threshold for itemizing taxes, what should I do?
Don’t worry you’re not alone. With the current standard deduction so high, many people are not able to hit the threshold for itemizing deductions.
However, there’s a smart tax strategy that’s gotten more and more popular called “Bunching” which involves grouping multiple years of charitable donations into one year and then tax deductions in the other years.
For example, a single tax filer who wants to give $6,000 a year to charity isn’t close to reaching the $13,850 standard deduction threshold. However, by bunching, they can double that amount by combining two years of contributions in one tax year, totaling $12,000. With this strategy as well as common expenses that qualify for tax deductions like mortgage interest and medical expenses, they can easily exceed $13,850.
Donor-advised funds like Daffy make bunching charitable contributions easy because you can first contribute the amount you’d like to bunch to your Daffy fund and immediately receive the tax deduction for that amount. You can then distribute some of those funds to the desired organizations when you’re inspired to give. So if we continue with the previous example, you can continue to give the $6,000 a year in 2023 and 2024 using the funds you set aside in Daffy.
What types of assets should I donate to charity to save on my tax bill?
For instance, if you donate a stock held for more than a year directly to a charity or to donor-advised funds like Daffy:
- You’ll avoid paying capital gains taxes on the stock.
- You can immediately deduct the full fair-market value of the stock on your federal income tax returns for that year rather than your cost basis.
- Because the organization receiving the stock is a 501(c)(3), they don’t have to pay taxes on liquidating the stock. Meaning, the full amount goes to the organization you care about. It’s actually a double-win for your tax strategy and your charity of choice.
Since the majority of non-profits don’t have the capability to receive stock, ETFs, index funds, and cryptocurrencies that’s where Daffy comes in. One major benefit of using Daffy is that you’ll never have to worry about whether your favorite nonprofit accepts the appreciated asset. Daffy does all the hard work for the organization and delivers the donations in cash to any of the 1.5 million nonprofits supported.
What do I need in order to claim a charitable contribution deduction?
The first step to ensure your contribution is tax-deductible is to confirm that the recipient organization is tax-exempt, which is another great piece about using Daffy. Since Daffy (like all donor-advised fund providers) is a registered 501(c)(3), your contributions to your Daffy fund are tax-deductible immediately. Plus, we’ll provide you with a simple tax summary.
If you make a donation elsewhere, you’ll need some information when tax season rolls around, including:
- The name of the organization and the donation amount.
- A bank or credit card statement showing the amount that came out of your account and on what date.
- A receipt from the organization.
You may also need to fill out extra tax forms depending on your contribution type. Noncash donations over $500 require IRS Form 8283. Fill out section A if your contribution is between $500 and $5,000 and fill out Section B along with an appraisal for non-cash contributions over $5,000.
Filing away this information right away makes tax season easier and also keeps you prepared in case of a future audit. Alternatively, if you give through Daffy, you’ll have your entire giving history stored for you, making tax season a breeze.
How much can you claim in charitable donations without receipts?
It depends on what type of contributions you give and how much.
- Any contribution of cash or property under $250 does not require a receipt. But any cash, check, or other monetary gift does require either a bank record or acknowledgment from the organization, regardless of the size of the gift.
- Contributions of $250 or more require both a bank record and written acknowledgment from the organization with the details of your donation.
Of course, with Daffy, all your donation receipts are stored for you and accessible anytime.
Ready to make a charitable contribution today? Get started with Daffy.
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.