By: Brock Alvord, CFP®
During the holiday season, we often seek additional ways to embrace the spirit of giving by extending kindness to those in need. We have the power to make a positive impact on society through charitable donations. Not only do these contributions support causes and organizations we care about, but they can also provide significant tax benefits. By understanding the tax advantages associated with charitable giving, you can make informed decisions that align with your philanthropic goals while optimizing your financial situation. In this blog post, we will explore five methods to maximize the tax benefit of your charitable donations.
When filing taxes, you are allowed to take the greater of the standard deduction or your personal itemized deductions. The standard deduction is a fixed amount the government allows each taxpayer to use to reduce the amount of income that is taxed. Itemized deductions consist of mortgage interest, charitable donations, state and local taxes and a few other minor categories. When these itemized deductions combined exceed the standard deduction ($13,850 for single filers and $27,700 for joint filers), you are allowed to use the greater deduction to further reduce your taxable income.
Due to current tax laws, the standard deduction is considerably large and can often be difficult to surpass through itemized deductions. One strategy to consider is to adjust the timing of your charitable donations through “bunching”. Rather than making your charitable donations each calendar year, you can instead stack two years (or more) worth of charitable donations during one calendar year.
This strategy allows you to take advantage of the high standard deduction in one year and then significantly increases the itemized deduction the following year. You are not changing how much you gift, rather the timing of the donation. This should maximize the tax benefit compared to gifting the same dollar amount each calendar year.
Related to strategy 2 above, a donor advised fund (DAF) is a unique vehicle through which you create your own personal charity. It is important to note that this strategy generally makes the most sense when you have significant assets or a large income windfall, of which you wish to charitably gift. This strategy makes a large donation upfront to the DAF, allowing a bigger tax deduction during that given year. The funds then remain in the DAF and the donor is permitted to make grants to qualified charities of their choice at any future point. This enables you to bunch the tax benefit in a single calendar year, but to time the donations at a future date.
Rather than donating cash, an alternative is to stack the benefit of your gifting through donating appreciated assets, such as stocks, bonds, or real estate. When you donate appreciated assets held for more than one year, you not only receive a charitable deduction for the fair market value of the asset (through your itemized deductions) but also avoid any capital gains taxes on the appreciation. This allows you to support charitable causes, increase your tax deduction while also avoiding capital gains taxes.
For individuals ages 70½ or older who have individual retirement accounts (IRAs), a Qualified Charitable Distribution (QCD) can be an excellent tax-planning tool. Through a QCD, you can directly transfer funds from your IRA to a qualified charity. The distribution counts towards your required minimum distribution (RMD) and is considered a tax-free distribution. This can be particularly beneficial for those who cannot itemize their deduction or do not need the full amount of their RMD to maintain their lifestyle.
Please note that this blog post is not intended to be financial advice, but rather an educational outline of charitable giving strategies. These strategies should be discussed with a qualified tax professional prior to implementation.
Coign Capital Advisors is a fee-based investment advisory firm based in Draper, Utah. Specializing in serving retirees, business owners, and entrepreneurs, the firm provides holistic wealth management that goes far beyond investment consulting and strives to attain suitable performance combined with solutions that make clients’ financial goals achievable. Led by J. Matthew Zundel, ChFC®, M. Brandon Riley, CFP®, Adam G. Lefler, Daniel R. Zundel, Courtland Adams and Brock Alvord, CFP®. Clients receive a high level of service from a team with more than 100 years of combined experience. To learn more, visit www.coigncapital.com.
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