Donating at the End of 2022? Here's What You Need to Know
The tax rules for claiming contributions are changing. Here's how they will impact that end-of-year donation.
About a tenth of all charitable contributions are donated on Dec. 30 and 31 of each year.
Maybe it's the giving spirit, or maybe it's the tax benefits. These last few days of December see some of the most donations of the year. About one-fifth of nonprofit revenue comes in December, and 10% of all donations to nonprofit organizations come on the final two days of the year, according to Neon One, a software developer for nonprofits.
Along with the giving spirit of the winter holiday season, the end of the year also brings a final opportunity for taxpayers to adjust their taxable income for 2022 by making charitable donations.
Gifts to charity can still reduce your taxable income and increase your tax refund, but some of the rules for deducting charitable donations are changing for 2022. Get all of the information you need about contributions to charities and your taxes.
For more on tax deductions and credits, see the best tax software of 2022.
How can donations to charities reduce my taxes?
Contributions to charities and non-profit organizations can be deducted from your adjusted gross income (AGI) so you may pay less in taxes in a year. To qualify for tax-advantaged donations, nonprofits must be included in the IRS database of tax-exempt organizations.
Gifts to charity are considered income deductions, not tax credits. While charitable donations will reduce your taxable income, they don't come directly off your tax bill. Depending on your income bracket, 10% to 37% of your donation will come back to you in money saved on taxes.
For example, a single tax filer in the middle tax bracket of 24% (based on $89,076 to $170,050 in taxable income) will save $24 in taxes for every $100 contributed to charity. At the upper tax bracket of 37% (taxable income of $539,901 or greater), a donation of $100 saves $37 on taxes.
If you are donating goods or services, you are allowed to deduct their "fair market value" on your tax return. Cash contributions above $250 and all non-cash donations require documentation of proof such as a receipt from the charity.
To claim charity gifts on your 2022 taxes, you must itemize your deductions
Tax-deductible charitable donations have historically only been available to taxpayers who itemize their deductions. However, during the first years of the COVID-19 pandemic, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 allowed charitable gift deductions of $300 for single filers and $600 for married joint filters who took the standard deduction instead of itemizing.
Those changes applied to 2020 and 2021 but now expire in 2022. Congress has not passed any additional legislation to continue that limited carveout of charitable deductions for taxpayers who take the standard deduction. You can only deduct your gifts to charity from your taxable income for 2022 if you itemize your deductions using Form 1040 Schedule A.
The Tax Cuts and Jobs Act (TCJA) of 2017 almost doubled the standard deduction, from $6,350 for single filers and $12,700 for married joint filers in 2017 to $12,000 and $25,000, respectively, in 2018. The standard deduction is adjusted for inflation each year and will be $12,950 for single filers and $25,900 for married joint filers in 2022. About 90% of taxpayers now use the standard deduction when filing their tax returns.
Charitable donations are now limited to 60% of your income
During the start of the COVID-19 pandemic, federal legislation also temporarily eliminated the income cap on charity gift deductions. Traditionally, your deductions for charitable donations have been limited to 60% of your adjusted gross income (AGI), but the same legislation that added charitable deductions for standard tax filers also allowed any taxpayers to deduct up to 100% of their AGI in charitable contributions.
Similarly to the end of the exception for taxpayers using the standard deduction, the change to the charity deduction income limit expired at the end of 2021.
Donate stocks and RMDs to charity without paying taxes on them
Two investment options still provide excellent tax advantages for charitable donations -- stocks or other securities that you've held for longer than a year and required minimum distributions (RMDs) from retirement accounts.
If you donate stock that you've held for more than a year, you're giving 20% more than if you sold the stock and donated the proceeds. That's because charities don't have to pay the long-term capital gains tax on the appreciation of the stock. You can also deduct the full market value of the stock at the time of your donation, including the capital gains you never paid taxes on.
RMDs are distributions from your retirement accounts that you must withdraw by law starting at age 72. These accounts include traditional IRAs, SIMPLE IRAs, simplified employee pensions and 401(k) accounts. Roth IRAs are not subject to RMDs.
The extra income from RMDs can push you into a higher tax bracket and also trigger phaseouts of tax credits based on income. However, RMDs donated to charity (up to $100,000) are considered qualified charitable contributions (QCDs) that are tax-free and don't count as income.
You can use QCDs to support as many organizations as you like, but some charity options like donor-advised fund sponsors and private foundations cannot accept QCDs so be sure to check with your potential recipient before taking action. QCDs must be made directly from your retirement account administrator to the charity. Like other charitable donations, QCDs must be made by Dec. 31 in order to qualify for the 2022 tax year.
For more on 2022 taxes, peruse our end-of-the-year tax checklist and learn about tax refund advances.