5 Tips for Charitable Giving to Reduce Your Taxable IncomeSubmitted by JMB Financial Managers on December 15th, 2020
‘Tis the season of giving and, as the end of the year approaches, it is also the time to make year-end tax saving moves. Regardless of the tax benefits, giving back to your community, especially after the devastating year we’ve had, can truly change people’s lives. Luckily, supporting causes and communities in need leaves a lasting impact but also helps to lower your taxable income, allowing you to both support a cause you believe in and reduce the amount you owe in taxes.
If you itemize your deductions when filing taxes, last-minute charitable donations could help decrease your tax bill as contributions are deductible for the year in which it was paid. Here are 5 tips for how to reduce your taxable income while supporting causes that are meaningful to you.
1. Donate Appreciating Securities
Cash and checks are the most common ways people make donations to charity, but recently, there has been a greater interest in donating stocks, bonds, or mutual funds that appreciate over time. If your securities are publicly traded, they most likely can be donated to a charity.
When donating your securities, you can claim the fair market value in your itemized deductions on your income tax return. You can deduct up to 30% of your adjusted gross income. Privately traded securities can be deductible as well, but usually have additional restrictions and requirements. Since you’re donating the securities, rather than selling them, no capital gains taxes will be owed which adds to your tax savings!
2. Open a Donor-Advised Fund
Another way to give to charity while reducing your taxes is by opening a donor-advised fund (DAF). The DAF will be sponsored by a public charity. Your charitable contributions will go to that charity and you will receive an immediate tax deduction. Another benefit of a DAF is that you get to make grant recommendations for any eligible 501(c)(3) charity of your choice. Any contributions you make to the DAF give you the immediate tax deduction without you having to immediately decide which charity to give money to. Then whenever you like, you can give grant recommendations to any qualifying charities.
3. Bunch Your Donations
“Bunching” simply means you concentrate your tax-deductible charitable contributions into one year, and then skip for a year or two. This can especially help you if your total deductions are less than the standard deduction in a single year. So, you give 2, 3, 4, etc. years’ worth of contributions in one year (provided you are financially capable of doing so responsibly) which will raise the value of your deduction above the threshold that year.
4. Make a Qualified Charitable Distribution From Your IRA
If you’re over 72 and have annual Required Minimum Distributions (RMDs) from your IRA, you can make a qualified charitable distribution (QCD) to offset that amount. QCDs allow funds to be withdrawn without tax consequences and can help satisfy your RMD for that year. A charity has to eligible to receive a QCD in order for this strategy to work.
5. Donate Complex or Illiquid Assets
Assets like private company stock, restricted stock, real estate, alternative investments, and even bitcoin can be donated directly to charity. As mentioned previously, these types of assets require more time and effort to donate due to the specific requirements and limitations of each one. However, these types of assets tend to have a fairly low-cost basis, especially for entrepreneurs who started their own companies. Not all charities have the capability to accept these types of donations.
Deductions for Business Owners
While itemizing your 2020 tax deductions, don’t forget that any “ordinary and necessary” business expenses are also tax-deductible. This can include the home-office deduction, reimbursement or write-offs for mileage, and any equipment or necessary items purchased for your job or office, so keep those receipts and track your expenses to save even more on taxes! For more information on tax deductions check out our blog, Year-End Tax Moves for Small Business Owners.
Need Help Planning Your Charitable Contributions?
If you have any questions about the tips mentioned here, or need help planning how to make charitable contributions this year, don’t hesitate to contact us before the end of the year. Schedule a complimentary consultation today.
About the Author
Jack Brkich III, is the president and founder of JMB Financial Managers. A Certified Financial Planner, Jack is a trusted advisor and resource for business owners, individuals, and families. His advice about wealth creation and preservation techniques have appeared in publications including The Los Angeles Times, NASDAQ, Investopedia, and The Wall Street Journal. To learn more visit https://www.jmbfinmgrs.com/.