Falling later than usual this year, December 3rd is Giving Tuesday, a powerful reminder of the transformative impact generosity can have – not just for those we support, but also for ourselves.
From a financial perspective, charitable contributions are a strategic tool for reducing taxable income, helping you to optimize your tax position as the year draws to a close. Consider how to support what you’re passionate about by aligning your giving and values while gaining valuable tax benefits.
Several strategies can be used to help lower your tax burden for doing something nice:
- Lower your overall tax burden
If you itemize, you can get a tax deduction for the money or assets that are donated. The IRS will allow you to get a deduction of up to 30% of your Adjusted Gross Income (AGI) for assets and 60% of your AGI for cash donations. Let’s say your AGI is $100,000, you can then deduct up to $30,000 for stock you donate and up to $60,000 of the donation if you give cash. With proper planning, you can take advantage of both of these numbers. Let’s say you want to give $40,000. In this example, you can give $30,000 in stock to get up to the 30% limit and then donate $10,000 in cash to get up to the $40,000 gift, while still getting the full deduction for the $40,000 donation.
- Donate appreciated assets
Giving stock that has appreciated is a great way to reduce taxes. Let’s say you bought ABC company stock for $20, and it is now worth $100. If you donate the stock, you can avoid paying taxes on the $80 in capital gains. This allows you to avoid taxes altogether (and you will get a tax deduction if you itemize). Aside from stocks, other assets like ETFs, mutual funds, cryptocurrencies, and other assets work as well.
- Avoid unnecessary taxes with a Qualified Charitable Distribution (QCD)
If you are 70.5 years or older, you can take money out of an IRA tax-free and give this to charity and they do not have to pay taxes on the money either. This is even more advantageous if you are subject to Required Minimum Distributions (RMDs). Let’s say the IRS requires you to take $30,000 out of your IRA but you do not need the money. You can elect to use a QCD and give any portion of that $30,000 to charity and this will satisfy your RMD requirement for the year and neither you nor the charity will pay taxes on the QCD as well! The IRS allows you to give up to $105,000 in 2025 using QCDs.
- Get the tax deduction now and gift the money later
If your income is higher than normal this year due to a one-time event like selling a home or business, then using a Donor Advised Fund (DAF) is a great tool to control taxes. A DAF allows you to put money into the account and get the tax deduction now and you choose when and how the money goes to charities. For example, a recent client makes $200,000 per year but sold a small business for $1 million. The sale of the business can create a large tax burden, so using the DAF allows our client to get the deduction for a large gift now (in the year they need it most) and will grant that money to 501(c)(3) charities from the DAF over the next several years.
Moreover, research consistently demonstrates the mental health benefits of giving. Acts of charity have been shown to boost happiness, increasing feelings of fulfillment, while decreasing stress levels. By helping those less fortunate, you not only participate in building a better community but also enhance your own emotional wellbeing – a return on investment that pays dividends in positivity and mental resilience.
As always, we are here to discuss how philanthropy can best serve your financial plan. Please consult these articles and past webinar recordings that are full of valuable financial information.
Let’s work together to ensure your generosity aligns with both your personal and financial aspirations.
Qualified Charitable Distributions
Warren Buffett’s Philanthropy Letter to Shareholders
Charitable Giving BFSG Webinar
Prepared by Advisor Stream. Edited by BFSG. Copyright 2024.
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