The end of the year is often used to reflect upon all the good things the last year has brought and to give to those who have been less fortunate. For people who itemize deductions on their federal tax return, charitable gifting can be a great way to help others while also potentially minimizing your tax burden. If you’re looking to make the most of your charitable gifting, there are many different end of year charitable giving strategies you can use. The following are some of the most common.
If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs!
Donate Securities Instead of Cash
Cash and checks are a common form of charitable gifting, but they may not be the most beneficial from a tax perspective. Instead, you may want to consider donating long-term appreciated securities. When you donate stocks, bonds, or mutual funds that have appreciated over time, you can then claim the fair market value of the security as an itemized deduction. This deduction applies to any amount that is less than 30% of your adjusted gross income. When the securities are donated instead of sold, you no longer have to pay capital gains taxes. Since capital gains tax can be quite high, this strategy has the potential to save you quite a bit of money in the long run.
Create a Donor-Advised Fund
Another potential charitable gifting strategy is to create a donor-advised fund (DAF). A DAF is a giving vehicle that is sponsored by a charitable organization. Typically, a DAF is sponsored by one charitable organization, such as Fidelity Charitable, which then allows you to recommend grants to most 501(c)(3) public charities. When you contribute to a DAF, you can receive a tax deduction immediately, but you can also recommend grants over time.
A DAF gives you more flexibility in two different ways. First, it allows you to donate your money where and when you want. Secondly, you have more flexibility with the tax advantages. For example, if you have a year with higher-than-usual earnings, or you receive a large year-end bonus, you can offset the tax burden caused by these events.
Minimize Tax Costs of Converting a Traditional IRA to Roth IRA
With a traditional IRA, contributions are tax deductible and earnings grow tax-free, but you must pay taxes on your withdrawals. With a Roth IRA, you pay taxes on contributions the year they’re made. If you believe that your current tax bracket is lower than the tax bracket you’ll be in when you retire, then a Roth IRA can be a good option. By converting a traditional IRA to a Roth IRA, you can potentially save yourself from paying more in taxes later on. However, keep in mind that converting your traditional IRA into a Roth IRA will increase your tax cost for the year. One way to offset this cost is to make a charitable contribution.
Donate Complex Assets
Donating complex and illiquid assets, such as private company stock, restricted stock, real estate, or alternative investments, may be more complicated than donating publicly traded securities. But it can also provide some unique benefits, especially because these assets often have a lower cost basis than many other types of securities.
One thing to keep in mind is that donating these types of assets may also require putting in a bit more effort to ensure compliance with various laws and regulations. Some charities also may not be able to directly accept these types of assets, but this issue can usually be resolved by using a DAF to donate the assets.
Make a Qualified Charitable Distribution (QCD)
If you’re over 70 ½ years old, you may want to consider donating through a qualified charitable distribution (QCD). A QCD can satisfy your required minimum distribution, but the added benefit of a QCD is that you won’t have to pay taxes on the distribution. If you were already planning to make a charitable donation, this can be a great option for minimizing tax costs. A tax-free QCD is not reported as an itemized deduction on your tax return, which means it does not count towards the charitable gifting limit. This makes a QCD ideal if you’re already nearing the charitable contribution limit, have reached the charitable contribution limit, or if you have few other deductions.
Work with an Experienced Financial Advisor
These end of year charitable gifting strategies offer a way to give back while also minimizing your tax costs. While there are many different strategies to choose from, the one that’s right for you will require a holistic review of your financial situation. In order to gain a better understanding of the implications of the many different year-end tax strategies, including charitable gifting, consult an experienced financial advisor from Good Life Financial Advisors of Mount Pleasant! We look forward to assisting you.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.