This week for Taxtember we will discuss charitable giving strategies to reduce your taxes. With the 2018 tax cut, more taxpayers now take the higher standard deduction than itemizing their deductions on their 1040. So, a donation to a charity doesn’t have the same tax benefit it did unless you make a concentrated effort to make it happen. Let’s go through some ideas.
Bunch Your Giving. You could bunch several years of giving together to get you over the standard deduction receiving a higher deduction in one year and then taking the standard deduction for several years. You give the same amount to charity you just bunch several years into one.
Donor Advised Fund – I called a DAF a charity piggy bank. Basically you set up a fund with a charitable organization (like the Kearney Area Community Foundation or Schwab Charitable) and make donation. The amount of the gift should be at least $24,000. So, if your family gives $5,000 a year to charities, you have “bunched up” 5 years worth of donations at $25,000. Going forward you would direct the DAF to send a check to your various charities. So, your church can receive a quarterly offering check, the United Way collects an annual check for their campaign, and Goodfellows receives a donation each December.
Gifting Appreciated Stock – with the Bunching or a Donor Advised Fund your donation could be donating appreciated stock. If you bought Buckle stock years ago for $10,000 and now it is worth $50,000, you can donate the $50,000 to a charity or a DAF, receive the tax deduction for your gift, and not pay capital gains taxes on your gift. (A savings of $6,000 in capital gains taxes).
Qualified Charitable Distribution – If you have reached the age of 70 ½ you are able to take a distribution from your IRA and give it directly to a charitable organization up to $100,000. You will not have to pay taxes on the distribution. So, if you are in the 22% tax bracket and make a gift of $10,000 to your church, you will save yourself $2,200 in taxes by doing a QCD. So, we have a lot of clients that do this in January and give an annual gift to their church or other organizations for the year. The check will go directly from the custodian (like Charles Schwab) to the church.
The other benefit here for clients over 72 that must take Required Minimum Distributions, the QCD counts as part of your RMD. So, back to our example, if your RMD is $25,000 and you do a QCD for $10,000, then you will only need to pay taxes on a distribution of $15,000.
Next week…….Developing an action plan