Maximizing Charitable Contributions
Giving to charities is a great way to support causes and organizations you believe in but those contributions also have the added benefit of tax benefits at the end of the year. You can help make an impact in your community while also reducing your own tax burden. There are some important things to consider when making those contributions so you can maximize your tax benefits and we will outline them in this blog.
Charitable Contributions During Your Lifetime
There are two benefits to giving while you are still alive: tax deductions and estate deductions. In addition, you will also be able to see the benefit of those contributions. Here are some ways to make sure you are doing the most good while also helping protect your bottom line.
Give In High Income Years
As with anything, income tends to fluctuate. Some years you might make more than others. In those higher income years, bumping up your charitable giving into one larger donation instead of a few smaller ones might help.
Because the Tax Cuts and Jobs Act brought about a higher standard deduction, you might not itemize your deductions each year. When you group and/or increase your donations, you can itemize those deductions in a higher income year and then use the standard deduction in lower income years.
The maximum deduction you can take from donations is 60% of your adjusted gross income each year. Work to estimate your income each year and use that to guide your charitable contributions year after year.
Donate Assets that Have Greatly Appreciated in Value
If you have assets like real estate or securities that have greatly appreciated over time, selling them can get you hit with a capital gains tax. To avoid that, you can donate those assets to a qualified charitable organization and then lock in a deduction for the fair market value of the asset you donated. The charity won’t be responsible for the charitable gains tax and you get the deduction so it is a win-win.
Donating these assets will also reduce the overall size of your taxable estate making the tax burden on your heirs less, if applicable.
Qualified Charitable Distributions
Retirees who have traditional IRAs have to take a required minimum distributions after 72. After taking those distributions, you might find yourself in a higher tax bracket.
If you don’t need those distributions to fund your lifestyle but instead would like to use them for a charitable purpose, you can do a qualified charitable distribution. You can donate or rollover up to $100,000 each year and reduce your taxable income by excluding the amount gifted. If interested in doing this, contact the broker of your IRA account.
Charitable Donations After Your Lifetime
It is common to make donations through a will or a trust so you can keep making an impact even after you have passed on. While you won’t see those tax breaks, your heirs and estate will.
Give Your Retirement Plan Away to Charity
Naming a charitable organization who should receive your tax deferred retirement plan contributions is a good way to get some tax advantages. If you name an heir as beneficiaries of that plan, they will be subject to both income tax and potentially estate tax on the withdrawals.
Charities are exempt from taxes, so when you name them as beneficiaries of your non-Roth retirement assets, you both contribute to their cause and reduce the tax burden on your heirs. Even leaving just a portion of your plan can help reduce this tax burden.
Charitable Giving Both During and After Your Lifetime
One of the best ways to make an impact both during and after your life is to set up a charitable remainder trust or a charitable lead trust.
A charitable remainder trust allows the owner of the trust to change highly appreciated assets into an income stream. The owner of the trust gets a tax deduction, avoids capital gains taxes if the assets are sold, and can help avoid estate taxes in the future. Once the owner of the trust dies, the remaining assets go to the charity selected by the owner.
A charitable lead trust is essentially the opposite of a charitable remainder trust. Charitable lead trusts pay out an income stream to a qualified charitable organization for a set time period and when that time is over, the assets move to the grantor’s heirs. The grantor gets a tax deduction and can remove highly appreciated assets from the estate and transfer those assets to the heirs without any tax consequences.
Many cities and counties have community foundations that connect the philanthropic goals of donors with the needs of their community, and through leadership and community engagement identify and address those needs. Taxpayers can make one-time or multiple donations to such organizations, and in doing so can maximize their tax deduction in the year of contribution but have those funds distributed to the charity(ies) of their choice over many years.
Work with an Advisor
One of the best ways to maximize the tax benefits of charitable contributions is to work with an advisor. The experts at MCK can help you strategize the best ways to reduce your tax burdens and maximize the income benefits and the best time to start is today! Contact us to talk more about how to manage your charitable contributions.