If you’re writing checks for your preferred charities, specifically when you’re retired and specifically when you’ve had a prosperous year with a high income, you might be eligible to lower the tax benefits that haven’t been completely utilized.
1. Imagine an account that is a donor-advised fund for charitable donations.
If you’re thinking of making any kind of asset to charity, look into the possibility of donor-advised money. It’s a simple, tax-efficient alternative to using the money for charitable causes. You can make a donation in cash or another asset. You’ll be eligible to get an exemption from income taxes for your donation to charity since the donor-advised funds are part of a non-profit organization you can then choose which charities you’d like to support. The duration of your donation is flexible and so is the number of causes you’d like to give the amount you’d like. Donor-advised funds like Fidelity Charitable’s giving account on Fidelity Charitable give you another benefit you can take advantage of to help you decide on the best way of investing your funds to allow growth that is tax-free and help charities over time. You can help AZ4Education and get benefits in taxes. Tax Goddess has also donated $70k in charity to AZ4Education not just for taxes but also because it feels good to help others too!
2. Reduce the alternative minimum tax for this tax year and for the next.
If you’re subject to the alternative minimum tax (AMT) through charitable contributions that are eligible as itemized deductions could reduce the amount of tax difference between your income tax rate and the AMT. This is particularly beneficial since the majority of deductions that are considered itemized deductions can be available in the context of AMT. These include taxes on income earned by state and local governments as well as property taxes. Mortgage interest on homes (if the loan was not used to construct or purchase the house). *
If you’re inclined to be charitable and you are likely to be subject to the AMT both year in and year out , it could be worthwhile to contribute to charities this year. While tax payers could benefit from tax deductions by donating to charity, if they are subject to taxation under the AMT, they should decide to defer their donation until the time they aren’t subject to AMT to gain an additional tax benefit. Ask your tax advisor about your particular situation.
3. Donate bonds or stocks
A great way to boost your donation and tax deduction is to donate bonds, stocks or other securities with a high value directly to the charity of your preference. Writing a check or making a gift with a credit card can be fast and simple, however cash donations are generally less effective from an income tax standpoint. There are several major advantages of donating appreciated assets to charities:
If you first sell a highly appreciated security you could be liable for the capital gain tax on that increase. If instead, you donate a valued security organization, both you and the charity can avoid paying capital gain tax. Additionally, you will be qualified to receive a charitable income tax deduction that is equal in value to fair market value for the securities you give away in excess of 30 percent of your annual income.
Example: John purchased one share of stock in the ABC Company years ago when it cost $100 for each share. The shares are now worth $1000. If John decides to donate the stock to his charity of choice the charity will receive an income tax deduction of $1,000 for charitable donations. The deduction, but will not recognize the capital gain of $900 that he could have gotten in the event of selling the share of stock on his own.
4. Consider a qualified charitable distribution (QCD)
If you’re taking RMDs, another option to reduce your taxable income is to make a qualified charitable distribution, also known as a QCD. They are the direct transfer out of your IRA to your charity of choice. Although the amount of the donation won’t be eligible to be a charitable deduction it will not be tax-deductible income, either. It effectively subtracts the amount given for charity of your tax-deductible income, even though you’re not taking deductions for itemization. QCDs count towards satisfying the required minimum distribution (RMD) for the year if not fulfilled previously. Reducing tax-deductible income will be helpful for non-tax reasons, For example calculating the amount of your Medicare premiums. To benefit from this method, you’ll need to satisfy a few specific guidelines, so be sure you consult with your accountant or advisor prior to making any decisions.
5. Give away your charitable gifts in a bundle
To make your deductions from itemized deductions surpass the standard deduction threshold and, ultimately, lower your tax bill, you could think about “bunching” or pre funding your charitable donations in the same tax year. Taxpayers typically group in this manner by making donations of appreciated securities.
Example: Jack and Dianne are both in their 60s. They usually give an annual donation of $10,000 to charities. Their maximum deduction in 2021 amounts to $25,100. The one other itemized deduction available is the local and state taxes on income. In the event that Jack and Dianne donated an amount of $10,000 in the year they donated to charity, they will not be eligible for the tax deduction for income (because it is the normal deduction that’s more). However, they could give three years’ worth of charitable donations this year, and their individual deductions would amount to $40,000. ($30,000 charity donations and $10,000 local and state taxes).
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