Ed Slott: Make Your Charitable Gifts Count at Tax Time

Key Takeaways

• More people will be itemizing instead of taking the standard deduction on their taxes because the state and local tax deduction was raised to $40,000 under new legislation.
• IRAs are the best assets to give to charity because they’re loaded with taxes.
• Qualified charitable contributions can also offset the income from a required minimum distribution.
• For your QCDs, you need a contemporaneous written acknowledgement, a CWA, which is a receipt from the charity saying you gave the deduction and you didn’t receive any goods or services back in return.
• In the new year, everybody, not just high earners, will have their charitable contributions clipped a little by a floor of 0.5% of adjusted gross income. So, think about giving in 2025 rather than waiting around until 2026.

Christine Benz: Hi, I’m Christine Benz for Morningstar. Investors often prioritize charitable gifts in the fourth quarter. Joining me to discuss some recent tax changes that affect charitable giving this year and next is tax and retirement expert Ed Slott. Ed, thank you so much for being here.

Ed Slott: Well, it’s great to be back with you, Christine. Thanks.

Why Taxpayers Will Be Itemizing in 2025

Benz: It’s always great to have you here. We wanted to talk about charitable giving for this year, 2025, as well as for next year. But let’s start with 2025. Because, from what I’ve been reading, Ed, it sounds like many more people will be likely to be itemizing this year, so their charitable giving might be more relevant to them than it has been in the past few years. Can you talk about that?

Slott: Yes, that’s absolutely the case. Before this year, under the Tax Cuts and Jobs Act, just to give you the history, you may recall, many people do, that they killed the deduction for state and local taxes, put it down from unlimited to $10,000. So, what happened is that basically took almost everybody out from claiming itemized deductions. And according to IRS, for all those years since, more than 90% of taxpayers have been taking the standard deduction because they didn’t have enough deductions to itemize to get over the standard deduction limit, mainly because they were limited to a $10,000 limit for state and local income taxes.

Now, under the OBBBA law, the One Big Beautiful Bill Act, that’s been raised to $40,000, effective this year for 2025. So that’s effective now. That brings you up to $40,000. Well, that gets you into the itemizers club. That gets you entry into this special club. Now you can pile on other deductions, like your charitable deductions, mortgage interest, medical deductions if you qualify. More people are likely to get that boost from the SALT deduction to get them into itemized territory. And they can pile on these other deductions to do much better on their taxes this year.

How to Make Your Qualified Charitable Contributions Count

Benz: And I do think a lot of taxpayers had probably gotten a little complacent about keeping track of their receipts for charitable giving because it wasn’t relevant for the reasons you mentioned. One evergreen strategy that I know you love for people who are 70 and a half or older is this qualified charitable distribution. Can we talk about that? And maybe you can talk about some of the common questions you get in this realm. I hear a lot about logistical questions related to this QCD. People want to make sure that it counts if they’re making these distributions from their IRAs. Can you talk about that?

Slott: Yes, it’s one of the best provisions ever created in the tax code. You always win with it if you qualify. The only downside, as you said, to qualify, it’s only available to IRA owners, not plans, not 401(k)s, only available to IRA owners who are 70 and a half years old or older, or IRA beneficiaries who are also 70 and a half years old or older. Even though the RMD age is 73, this age stayed at 70 and a half. So unless you’re 70 and a half or older, you don’t get to benefit from it. But what is it? It’s a distribution, a transfer, direct transfer from your IRA to a qualified charity. And the funds that come out of the IRA are not taxed at all. And if you’re making contributions anyway, if you give to charity anyway, if you’re charitably inclined and you qualify, do it this way.

First of all, IRAs are the best assets to give to charity because they’re loaded with taxes. So give that money to your charity. If you’re giving, say, $5,000 anyway and you qualify, take a $5,000 distribution—not a distribution, it’s a direct transfer to the charity from your IRA. And it doesn’t count as income. So that, in effect, reduces your income, especially if you’re subject to RMDs. And that brings us into another realm of planning. It’s the timing. It can also offset the income from an RMD. For example, if your RMD is $5,000 and you take a $5,000 QCD, you transfer from your IRA to a charity. You don’t have to take your RMD. It’s considered satisfied if you do it in the right order. The problem is as 2025 or any year winds down, people start thinking about charity now. And they also start thinking about RMDs. The way you want to do it is take the QCD first before you take your RMD.

What Documentation Do You Need for Your QCD?

Benz: How about the documentation required? That is something that I think hangs people up. They want to make sure that they did it the right way. What should they know?

Slott: Well, you have to have the documentation. And you made a great point that I didn’t think of before. People were probably lax because last year not knowing about the One Big Beautiful Bill access. You don’t have to keep any records. You’re going to be taking the standard deduction forever. Well, this year, because of that new SALT deduction, you’re probably going to be taking itemized deductions. You may have to go back and do some digging. And you have to have what’s called a contemporaneous written acknowledgment, a CWA. And you need that for the QCDs also. Basically, it’s a receipt from the charity saying you gave the deduction and you didn’t receive any goods or services back in return. You’ve all seen those letters. If you’ve given to any charity, you get this letter. No goods or services; there was no quid pro quo for the charitable contribution.

Changes to Charitable Giving in 2026

Benz: I want to look forward into 2026 because there are some fairly significant changes related to charitable giving that come into play starting next year. Let’s start with the one that it sounds like is going to mainly have an impact on the higher-income, more highly taxed people. Can you talk about that and why they may actually want to think about giving in 2025 rather than waiting around until 2026?

Slott: Right. You can bunch more deductions into 2025 now that if you also qualify for the SALT deduction. But here’s the thing. There’s a disconnect here because of the SALT deduction and this deduction. What we’re talking about is a deduction reduction for next year. If you’re in the 37% bracket, that means you probably didn’t qualify for the SALT deduction anyway because your income’s over $500,000. There’s a $500,000 income limit, which is a pretty big limit to qualify for that $40,000. So, if your income is so far over that, that you’re in the 37% bracket, and a married couple filing joint would be in the 37% bracket over $751,000.

If they’re at that limit, they won’t get the SALT deduction. They may not even be able to itemize. But let’s say they have other big deductions because they’re high earners. If they’re in the 37% bracket, now this is next year in ’26, they will not get the full 37% benefit of that deduction. It will be limited to 35%. Also, not just high earners, but everybody will have their charitable contributions clipped a little by what’s called a floor of 0.5% of your adjusted gross income. That doesn’t sound like a lot. But if your adjusted gross income is $200,000, 0.5% is $1,000. If you gave $1,500, $1,000 would not be deductible. For those two reasons, you might want to throw more charitable contributions into this year. If you’re giving anyway, load them up this year. If you think you might get clipped by some of that next year.

But next year, on the flip side, you have something else to think about. You have something that goes your way. You have a new deduction available for nonitemizers, like somebody who’s not able to itemize because they’re not getting the big SALT deduction, for example, of $1,000 or $2,000 if you’re married filing joint. So you get that next year that begins, not in ’25, but in ’26. So, if you think you still might do better next year because you’re married joint and you don’t even give the $2,000, you get the $2,000 anyway for nonitemizers.

Benz: OK, Ed. It’s a little bit of a Rubik’s Cube as always. Thank you so much for being here to give us the rundown on charitable giving. We appreciate it.

Slott: All right. Thanks, Christine.

Benz: Thanks for watching. I’m Christine Benz.

Watch How to Manage Capital Gains Distributions in 2025 for more from Christine Benz.