I read your column Can I donate to a charity directly from my 401(k)? In which you wrote, “…you could take a distribution and subsequently donate it to charity, but you may not get any tax benefit from doing so if you do not itemize deductions.” Why would there be no tax benefit? Aren’t charitable donations deductible?
As discussed in that column, to make a donation from a 401(k), one must distribute funds from the 401(k) then stroke a check to the charity. This often results in little or no tax benefit.
Contributions to charity are listed on Schedule A, Itemized Deductions. For most people, some or all of a charitable donation does not result in a tax benefit because most people use the standard deduction and do not itemize so some or all the gift is absorbed by the standard deduction.
The standard deduction for 2023 for a couple filing a joint return ranges between $27,700 and $30,700 depending on the ages of the filers. For single filers, it is $13,850 or $17,550. Taxpayers get to use the standard deduction to reduce their taxable income even if they do not spend a dime on any deductible items. Therefore, to get a tax benefit for a donation or other item that would be accounted for on Schedule A, the total of all Schedule A deductions must first exceed the standard deduction.
Schedule A includes items such as medical expenses not covered by insurance, property taxes, other state and local taxes, mortgage interest and certain other expenses. Many of these itemized expenses, including charitable gifts, are subject to limitations. You can see the form and the instructions listing those other expenses and limitations on the IRS site here. If you have no mortgage, modest state and local tax bills and modest medical expenses, the total of the allowable expenses on your Schedule A could be far below your standard deduction.
Let’s say your noncharitable allowable itemized expenses total $10,000 and your standard deduction is $29,200 for you and your spouse. The first $19,200 of charitable donations will be absorbed by the standard deduction and provide no additional deduction. In this scenario, a $20,000 cash charitable donation would result in a net benefit of a mere $800 additional deduction over what the standard deduction provides.
That’s an $800 deduction against taxable income, not an $800 reduction in the tax bill. The reduction to the tax bill would approach $400 for the highest income taxpayers but for most, it would be far less.
As I mentioned, this dynamic is not exclusive to charitable donations. It applies to any of the expenses that can be listed on Schedule A. For instance, many people find out after buying a house that none or only a portion of the mortgage interest yields any extra deduction beyond the standard deduction because they have few other itemized expenses.
Keep in mind too, unless Congress extends the current rules, the standard deduction will drop back to its much lower previous levels starting in 2026. As a result more expenses may appear on Schedule A then than do now.
Even if you are not expecting to itemize in a given year, there are other gifting techniques that may offer you some tax benefits such as donating appreciated assets, bunching donations, and Qualified Charitable Distributions from IRA accounts if eligible.
I don’t want this column to discourage anyone from making charitable donations. There are many wonderful nonprofits worthy of support whether there is a tax break in it or not.
If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.