Charity is a wonderful thing. But giving to charity is also a great way to help maximize your tax deductions, which can save you thousands of dollars.
If you're planning on making a charitable donation this year, understanding the tax strategies related to charitable contributions can help you decide how much to give, what assets to give, and when to give; so you can provide the maximum amount to charity—and receive the maximum tax advantages for yourself.
Here’s what you need to know about Charitable giving.
Tax Strategies for Charitable Contributions
When you give, you're also giving back to yourself. There's nothing like the feeling of knowing that your hard-earned dollars are going toward a good cause—and that you've helped people along the way.
But here's the thing: giving has value beyond just making someone's life better. It also has value in terms of the tax code, which provides a variety of tax incentives to support those who wish to use their funds to do good. Check out these tax strategy tips below:
Donating long-term appreciated assets like bonds, stocks or real estate to charity is a great way to give back. You can get a tax deduction for the full fair-market value of the donation and you don't have to pay capital gains taxes on the asset.
The amount of your deduction depends on your adjusted gross income. For example, if your AGI is less than $200,000 per year, it's up to 30%; if your AGI is more than $200,000 per year, it's up to 20%.
If you're donating stock, be sure that your broker reports the sale appropriately so that you know how much you'll be able to deduct.
As tax laws change, tax-related gifting strategies may need to be adjusted. But the values and philanthropic legacy will persist.
According to the report Giving USA, U.S. families and individuals give an average of more than $1 billion to charity every day, a major force for addressing important needs in our communities. The value of giving is also recognized by the U.S. tax code, which provides a variety of tax incentives to support those who wish to use their funds to do good.
With just a few months left before the traditional year-end giving season, take time now to evaluate how your existing charitable strategies may fit into the current tax and economic landscape, and determine if you may benefit from making any adjustments. Charitable giving remains a core value for many American families.
But you still have options to receive a tax benefit—you just have to plan ahead. Bunching your charitable giving into one year allows you to surpass the itemization threshold and qualify for various charitable tax deductions. In off-years, you take the standard deduction.
Donor-advised funds are a great way to organize and plan your charitable giving. You can contribute to a donor-advised fund program and receive an immediate tax deduction.
You can then recommend grants over time to any IRS-qualified public charity and invest the funds for tax-free growth. Donor-advised funds provide many benefits for organizing and planning giving, but they also offer advantages in terms of income, capital gains and estate taxes. In some cases, these benefits are more advantageous than those from contributing to a private foundation.
Reduce Taxes Through Charitable Giving
It’s not just that your donations to 501(c)(3) public charities can qualify for an itemized deduction from income. It’s also that the tax rate is then applied to a reduced income, which means this can minimize your overall tax liability.
Did you know there are many ways to maximize this seemingly straightforward deduction? You can bunch your charitable contributions in a single tax year, using a donor-advised fund, to increase the amount you donate in a high-income year. The funds will then be used to support charities over time.
If you want to give back and minimize your tax liability, you might want to consider donating long-term appreciated assets. Not only can you deduct the fair market value of what you give from your income taxes, but you can also minimize capital gains tax of up to 20%.
Assets subject to capital gains taxes can include investments like stocks or mutual funds, or hard assets like real estate. They can include assets that are both publicly traded or non-publicly traded. For example, some givers donate shares of a private business before it is sold to dramatically increase their charitable impact
When it comes to estate planning, one of the most important things you can do is make properly structured gifts and donations. By doing so, you can remove assets from your estate before the total is tallied and taxed. In fact, if your estate plan makes gifts to charities, you have an unlimited charitable deduction—which means that your heirs won't be taxed on the assets given away.
Charitable tax strategies for estate planning purposes can be the most complex, and it typically makes sense to consult a professional. Commonly used strategies include the use of charitable trusts and careful selection of assets for distribution to various beneficiaries—charitable and otherwise.
Final Thoughts
It's important to understand your options when it comes to charitable giving.
Nicolas J. McLeod offers an array of services, including charitable giving. Nic is a second-generation Wealth Preservation Specialist. He has nearly 20 years of experience, and his client base is diverse in both their professional backgrounds and financial needs.
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