By Brittany Goodwillie, CFP®
Whether by volunteering their time or by making charitable contributions to their favorite organizations, many people start to think about helping others around the holidays. If you are looking to give financially, here are a few strategies you can implement to reduce your taxes.
Bunch Your Giving into One Year
For 2018, the standard deduction has increased to $12,000 for individuals and $24,000 for married couples filing jointly. This is almost double what it was in previous years.
Here is a simplified explanation of how your taxable income is calculated:
Less: Above-the-line deductions
= Adjusted Gross Income (AGI)
Less: Greater of: Standard deduction or Itemized deduction
= Taxable Income
Among other things, such as mortgage interest, charitable donations are an itemized deduction. Taxpayers only benefit from taking the itemized deduction if it is higher than the standard deduction. So, what does an increased standard deduction mean for many taxpayers? Even if you have itemized your deductions in the past, you may not itemize them this year. If you claim the standard deduction, the charitable contributions you make will not reduce your taxable income.
However, if you instead bunch multiple years of giving into one calendar year, you can increase your itemized deduction in that year in order to exceed the standard deduction. This strategy will reduce your taxable income in the years you make an increased contribution.
Use a Donor-Advised Fund
A good tool to use in order to bunch your charitable contributions into a single year is a donor-advised fund. You can choose to donate a large amount into a donor-advised fund and receive an immediate tax deduction without distributing the funds to a charity at the same time. You can then invest your contribution into the fund and then distribute the money to charitable distributions during subsequent years as you wish. Using the bunching strategy with a donor-advised fund allows you to save taxes in a single year but continue to give over multiple years.
Donate Appreciated Stocks Rather Than Cash
If you have securities that have a higher value than your purchase price or cost basis, you can choose to donate them directly to an eligible charity instead of donating cash. If it is stock you’ve held for over a year, you will realize a tax deduction equivalent to the fair market value of the stock contributed to the charity. The gain on this appreciated stock is transferred to the charity, and the charity can sell the stock to realize the gain tax-free. It’s a win-win for you and your favorite charity!
Donate the RMD from your IRA
If you are over 70 1/2, you are required by the IRS to take money out of your retirement accounts each year. These distributions are referred to as Required Minimum Distributions (RMDs). Typically, these amounts are included in your taxable income. However, if you are charitably inclined and don’t need the money for your expenses, you can choose to instead donate up to $100,000 of your RMD directly to a qualified charity. A qualified charitable distribution will reduce your taxable income, which can reduce your tax bill.
It’s important to remember that tax law can always change and the best tax strategies can differ year after year. Though these strategies are basic ways to make the most of your charitable contributions, the implementation of these strategies can be complex. Make sure you have professional help from your CPA and Financial Advisor to understand the best strategies for you.