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Tax tips to keep you on your toes

Tax tips to keep you on your toes

Tax deductibility of donations has changed with the times, and another piece of in-process legislation, if passed, would again reward charitable-minded tax filers who do not itemize, at least for tax years 2023 and 2024.

The Charitable Act, as it is known, would allow deductions of up to one-third of the applicable standard deduction for non-itemizers. As background, under the higher standard deduction passed as part of the Tax Cuts and Jobs Act of 2017, many donors who’d previously deducted their charitable donations lost that ability. Indeed, to the dismay of many nonprofits, tens of millions fewer households itemized their deductions in the years following the increased standard deduction, removing part of the incentive to make charitable gifts. The Charitable Act would strive to alleviate some of the negative impact on charities.

Recent history shows that taxpayers respond positively to deductibility opportunities, with 42 million taxpayers taking advantage of the $300 "universal" charitable deduction offered in 2020, and 24% of those having gross income of less than $30,000. That opportunity was extended in 2021 but discontinued for 2022. Notably, polling has shown strong support for restoring the universal charitable deduction.

With potential restored deductibility in the works—and again, it’s early in the process and not yet law—keep in mind that the community foundation is here to help your clients organize their charitable giving through a donor-advised or other type of fund.

Other charitable deductions and the vehicles that generate them that continue to land on the IRS’s radar are as follows:

–The IRS is really, really picky about requiring a charitable deduction to be calculatable as a true “sum certain,” as the taxpayer in a recent tax court case found out the hard way.

–The IRS appears to be doubling down on exempt purpose requirements for 501(c)(3) organizations. Keep these rules in mind, especially as you counsel clients who are involved with starting a new charity.

–The IRS is taking a close look at sketchy charitable remainder trusts in conjunction with its Dirty Dozen focus areas. As always, if a tax structure seems too good to be true, watch carefully for red flags and do your homework on the IRS’s positions.

For more resources and information contact Jen-L W. Lyman, Senior Director of Gift Planning and Advisor Relations, at (808) 566-5596 or jlyman@hcf-hawaii.org.