Charitable Giving

Strategic Charitable Giving: How to Make an Impact with Your Donations While Minimizing Your Tax Bill

Strategic Charitable Giving

Americans are some of the most generous people in the world. In 2021, Americans gave over $484 billion to charity, according to Giving USA’s 2021 Annual Report. More impressive is that individuals represent 67% of total giving, giving nearly $327 billion in 2021.

There are many reasons to give to charity, from feeling good to creating a legacy. Yet charitable giving can also be important from a financial planning perspective.

In this article, I’m sharing three charitable giving strategies to help you minimize your year-end tax bill.

Charitable Giving and Your Taxes

First, let’s review how charitable giving impacts your taxes.

Currently, taxpayers who itemize deductions can give up to 60% of their Adjusted Gross Income (AGI) to public charities, including donor-advised funds, and deduct the amount donated on that year’s tax return.

You can also deduct up to 30% of your AGI for donations of non-cash assets. In addition, you can carry over charitable contributions that exceed these limits in up to five subsequent tax years.

You need to know your marginal tax rate to calculate your potential tax savings. Your marginal tax rate is the amount of additional tax you pay for every additional dollar earned as income. So if your marginal tax rate is 28% and you itemize, you’ll save roughly 28 cents for every dollar you give to charity.

How to Make a Bigger Tax Impact With Your Giving

Yes, you can write checks to your favorite charities throughout the year, and while your donations may be generous, this approach to giving isn’t the most tax-efficient. Here are some ways to give that are:

#1: Donor-Advised Funds

One of the most efficient ways individuals can donate to charity is through a donor-advised fund (DAF). A DAF is a registered 501(c)(3) organization that can accept cash donations, appreciated securities, and other non-cash assets.

One of the advantages of a DAF is that you can take a taxable deduction in the year you contribute to it, even if you haven’t decided which charities to support. You can then invest and grow your funds tax-free within your DAF until you decide how to distribute them.

And, even better than donating cash, you can donate non-cash assets like highly appreciated stock to a DAF and avoid paying the capital gains tax. This strategy can also help you diversify your investment portfolio without triggering an unpleasant tax bill. Plus, you can take an immediate deduction for the full value of the donation (subject to IRS limits).

#2: Bunching Charitable Donations

Bunching your charitable donations can be beneficial if your total allowable itemized deductions are just under the standard deduction. In 2022, the standard deduction for single taxpayers is $12,950 and $25,900 for married couples.

Example:

Let’s say you give $3000 a year to charity, and it doesn’t get you over the standard deduction amount. However, you could go over the standard deduction if you “bunched” your charitable contributions into one year. For example, in 2022, if you gave $9000 instead of $3000 you could itemize deductions and save tax dollars. Then, you would skip donating in the next two years and go back to the standard deduction. Then, in the third year, you would donate $9000 again.

The result will be more significant tax savings over multiple-year timeframes.

#3: Qualified Charitable Contributions

If you’re age 72 or older and have a traditional IRA, the IRS requires you to take a minimum distribution (RMD) from your account each year. In most cases, RMDs are taxable at your ordinary income tax rate. There’s also a steep penalty for not taking your RMD before the deadline.

Meanwhile, if you have other sources of income like Social Security benefits and possibly a pension, your RMD can push you into a higher tax bracket. That means you may pay more taxes than you would otherwise, even if you don’t need the extra income.

The good news is you can donate your RMD by making a Qualified Charitable Distribution (QCD). A QCD allows IRA owners to transfer up to $100,000 directly to charity each year and avoid taxation on the amount.

A QCD can satisfy all or part of your RMD, depending on your income needs. You can also donate more than your RMD, so long as you stay below the $100,000 limit. This strategy can be helpful if you want to reduce your IRA balance and RMDs in future years.

It’s important to note that the IRS considers the first dollars from an IRA to be your RMD until you take the total amount. So, make your QCD before you take any other withdrawals from your account if you want to realize the full tax benefit of this charitable giving strategy.

A Trusted Financial Advisor Can Help You Incorporate Charitable Giving Strategies into Your Financial Plan

Of course, this is not a comprehensive list of charitable giving strategies that can help you make a bigger impact with your donations while lowering your tax bill. Other giving and tax planning strategies may be more appropriate depending on your circumstances and goals.

A trusted advisor like Curtis Financial Planning can help you incorporate giving strategies into your financial plan, so you don’t miss out on valuable tax benefits. Please start here to learn more about how we help our clients and the other services we provide.

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Emotionally Charged Money: Inheritance

Image: money from heaven

Image: money from heavenYou may be one of the many Baby Boomers or  Gen-Xers who have received an inheritance or will in the future. Studies predict that the wealth transfer from the “Greatest Generation” to their heirs will total in the trillions. If you are or will be a beneficiary, it pays to prepare yourself, as no money is more emotionally charged than inherited money.

There can be several reasons why emotional thinking can outweigh rational thoughts when it comes to inheritance. If you received it from your parents, you may recall how hard they worked for it. Your dad toiled at the office and your mom took care of the home and kids. You remember how they rarely relaxed or took a vacation, because they wanted to create a good life for you and not be a burden to you in their old age.  You may feel unworthy of their largesse.

Or, an inheritance can create a rift between you and your friends or family who aren’t as fortunate. You may feel guilty about your new change in financial status. You may also feel shame about how other people, in general, have so much less than you.

My clients who have received inheritances talk about feeling anxious, relieved, worried, happy, sad, guilty, and elated. These are natural reactions and to be expected. Problems arise when emotions dictate how you spend, invest, and save the funds.

Tips for Managing an Inheritance

Take a moment to absorb some of these ideas to prepare yourself and handle this potentially life-changing event:

  • Talk to a trusted professional about your feelings about the inheritance. Process them as much as possible before taking any action.
  • Make a list of things/experiences you want to buy and be careful not to overspend.
  • Create a plan for charitable giving and learn about giving vehicles such as donor-advised funds.
  • Carefully way out the pros and cons of lending family or friends money.
  • Develop a plan for investing the funds so as to earn a good return.
  • Do some financial planning. This windfall may be just what you needed to fund your retirement.
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A Little Year End Tax Planning with Your Holiday Punch

HD-200911-r-pomegranate-punchOr,  8 Year End Tax-Related Deadlines and Things to Think About

With the busyness of the holiday season, it’s easy to forget about things like tax planning. After all, we’d rather focus on having fun with our friends and family! However, there isn’t much you can do to improve your tax situation after December 31st for 2015, so now is the time to do a little planning so as not to miss out on tax-saving or retirement saving opportunities and avoid penalties. (After all, the IRS has ways of knowing who has been naughty!).

1. Roth IRA Conversions: There were income limitations on converting regular IRA’s to Roth IRA’s, but no longer, now anyone can convert IRA’s to Roth’s as long as they are able and willing to pay the tax on the conversion. Why would you want to do this? Because converting to a Roth IRA will guarantee you will owe no income tax on the funds if withdrawn during retirement because you pay the tax now. For example, if your income dropped in 2015 due to a job change, you might consider converting some of your IRA to a Roth because you will be in a lower tax bracket and pay less taxes than you might in future years. The deadline for conversions is December 31, 2015, but you will want to do this by at least December 22nd to make sure the paperwork gets processed with your custodian.

2. Establishing a New Qualified Retirement Plan:  If you are self-employed and want to establish a qualified plan such as a 401(k), money purchase, profit-sharing or defined benefit plan, it must be set up by December 31st. Many people confuse this deadline with the SEP IRA deadline that can go into the next year, including extensions.

3. Max Out Qualified Plan contributions. If you contribute to a 401(k) or 403(b) at work and have not contributed the maximum and are able to, talk to your payroll department to increase your contribution before December 31st. For those under 50, the maximum contribution is $18,000 and for those over 50, the maximum contribution is $24,000. At the very least, try to contribute up to any employer match.

4. Take RMD’s (Required Minimum Distributions) on retirement accounts if you have reached age 70 ½. The minimum distribution rules apply to traditional IRA’s, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit sharing plans and other defined contribution plans. If you don’t take the distributions or don’t take enough out, you may have to pay a 50% excise tax on the amount not distributed as required.

5. Take MRD’s From Inherited IRAs. If you have inherited an IRA from someone other than a spouse, you must take minimum required distributions beginning in the year after the year of death of the original owner and by December 31st of that year. To calculate the MRD, the IRS has a Single Life Expectancy table and each year you would subtract one year from the initial life expectancy factor. Fortunately, there are on-line calculators to help you do this!

6. Review Your Charitable Contributions. If you itemize deductions and are charitably minded, you will want to donate what you plan to before December 31st . You may deduct an amount up to 50% of your adjusted gross income, but 20% and 30% limitations apply in some cases. Good to know: donations made by check are considered delivered on the day you mailed it.

7. Donate Highly Appreciated Assets To Charity. Any long-term appreciated securities, such as stocks, bonds or mutual funds may be donated to a public charity and a tax deduction taken for the full fair market value of the securities up to 30% of the donor’s adjusted gross income. In addition to the tax deduction, the donor avoids any capital gains taxes. Probably the easiest way to do this is to set up a donor-advised fund –it’s like a charitable savings account: a donor contributes to the fund as frequently as they like and then recommends grants to their favorite charity when they’re ready.

8. Do Some Tax-Loss Harvesting. This is the practice of selling a security that has experienced a loss. By selling the security and taking the loss, an investor can offset taxes on capital gains or up to $3000 on ordinary income. The sold security can be replaced by a similar one, maintaining the optimal asset allocation and expected returns. When doing this, watch out for the wash-sale rule: your loss is disallowed if, within the period beginning 30 days before the date of the loss sale and ending 30 days after that date, you acquire a substantially identical security.

And, don’t forget to take a sip of that punch!

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Short List for your Finances 2014

listThere are many actions you can take to improve your finances, and that’s sometimes the problem. I have compiled a short list of ideas that can make a real difference in your financial health. Copy and paste this short list into Evernote or other list-making software or  print it out and tape it to your fridge. Then check off the items as you complete them and celebrate with your favorite indulgence – mine would be a piece of high-quality chocolate or a glass of Pinot Noir!

1. Write Down Your Financial Goals. We all know that writing things down makes them more real. Just having ideas floating  around in our heads  doesn’t cut it. Quantified goals are more likely to be achieved, so be as specific as possible as to deadlines and numbers.  For example, “I want to increase my net income by 20% in 2014 through a combination of decreasing expenses and adding new clients,”or “I want to reduce my spending on dining out from $500 to $300 per month.”  Next, you can make a plan to tackle your specific goals.

2. Make a Plan to Tackle Your Goals.
 Big goals can seem less daunting if you break them down into action steps. Take your list of goals and write down a simple plan of action for each. For example, taking the first goal above, an action item could be to review all business expenses from 2013 and determine whether they are 1. necessary 2. you could find a cheaper alternative, or 3. you could get away with spending less. Make a commitment to tackle the action steps by scheduling them into your calendar. 

3. Review Your Retirement Saving Strategy.  Most of us are saving on a regular basis to a retirement plan through our employer or through a self-employed retirement plan, but not all of us are saving as much as we could. Review your current payroll deductions into your 401(k) or your IRA contributions and see if you can increase the contribution amount to this year’s limits. Time is as important as the amount of money you save – it pays to start earlier than later.

If you are contributing to a Roth IRA, congratulations! – you have taken advantage of an excellent retirement savings vehicle. If you follow all the rules, you will only pay tax on the money invested once – before you contribute to the Roth. After that, your contribution and earnings can grow tax free for years.

4. Call your Insurance Agent. If you have been paying your insurance premiums for auto, home, and liability coverage on automatic, take the time to call your insurance agent or shop your insurance to feel confident you’re getting the best deal and your coverage is adequate for your current life situation. You might be surprised to find out that you have been overpaying or are underinsured.

5. Make a Charitable Giving Plan. Giving to needy or inspiring causes is a wonderful thing – the act of giving uplifts us and benefits the recipient. It  can also have excellent tax advantages, so it pays to know the different ways to give. For example, a great way to donate to a charity is to use a Donor Advised Fund (DAF). DAF’s can be funded using appreciated securities rather than cash, the securities are then sold within the fund to avoid the capital gains tax. The tax deduction is taken in the year when the account is funded avoiding ongoing record-keeping.

6. Understand Your Parent’s Finances. As uncomfortable as it may seem, it’s really important to talk to your parents about their financial planning so you know where they stand financially now and when they die. Questions to get answers to:  Do they have a plan to pay for possible long term care expenses? Have they created wills and trusts so that their estate is distributed with the least amount of costs and hassle? Do they have Durable Powers of Attorney set up for healthcare and finances? Knowing the answers to these questions before your parents grow too old will reduce stress later and possibly save dollars.

I’ll stop now and give you a chance to get started on your short list! If you enjoyed this post and found it useful, please let me know by commenting, tweeting it, or posting it on LinkedIn, Facebook, or Pinterest and I will plan to write similar posts in the future.

 

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Curtis Financial Planning