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Before the calendar year comes to a close, make sure to keep an open mind on ways to reduce your tax burden through charitable giving. Here are a few ideas to consider when determining what might be best for your family.
1. Think beyond cash as a donation.
Instead of writing checks, look at your portfolio with an eye toward donating long-term appreciated securities, real estate, private company stock and other potential investments.
Why? Capital gains taxes are eliminated when you contribute long-term appreciated assets directly to a charity, like Heart of Florida United Way, instead of selling the assets yourself and donating the after-tax proceeds. When you assume 20% for federal long-term capital gains taxes, plus a 3.8% Medicare surtax, this leads to a potential increase of 23.8% of both your tax deduction and your charitable contribution.
2. Create a larger current year deduction by combining cash and securities.
While donating appreciated securities typically eliminates long-term capital gains exposure, you are limited to 30% of your adjusted gross income (AGI) for deducting contributions of long-term appreciated securities. This is sufficient for most people, but there are some years when you might benefit from a larger current year deduction. In those select situations, you may choose to supplement a charitable gift of securities with a charitable contribution of cash. This strategic combination of giving is an opportunity to reduce your taxable income.
3. Create and use Donor Advised Funds (DAFs) to support your charitable giving.
A donor-advised fund, or DAF, is a charitable investment account for the sole purpose of supporting charitable organizations you care about. When you contribute cash, securities, or other assets to a donor-advised fund at a public charity, you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth, and you can recommend grants to any eligible IRS-qualified public charity. The timing is flexible, as are the number of charitable causes you support.
4. Planning for retirement? Set up and fund a donor-advised fund now, turning your currently high tax bracket into an advantage.
Establishing a donor-advised fund before you retire is an easy, tax-efficient way to make charitable giving a priority in retirement. And there’s potential for a more immediate benefit as well: substantially offsetting your current taxes.
If you’re 59 ½ or older with tax-deferred retirement accounts (like traditional 401ks or IRAs), consider if a charitable donation—and therefore, charitable deduction if you itemize your taxes—can help you offset tax liabilities on account withdrawals.
If you’re 70 ½ or older with a traditional IRA, you might consider making a Qualified Charitable Distribution (QCD). You can direct up to $105,000.00 per year from your traditional IRA to an operating public charity (unfortunately, this excludes a donor-advised fund).* Those QCD funds aren’t considered taxable income for you, and, if needed, you can use a QCD to satisfy your IRA’s 2024 required minimum distribution (up to $105,000.00). However, you won’t get a tax deduction for a QCD because the amount donated was not included in your income.
5. Take a multi-year approach toward deductions.
If your income is particularly high this year, perhaps as the result of a year-end bonus, or you’ve sold a business, benefited from an inheritance or otherwise, consider that charitable contribution deductions may be carried forward for up to five years. Carried-forward deductions must be used to the extent possible in the next tax year and are considered after any current year charitable contribution deductions.
6. Make a charitable donation to offset the tax costs of converting a traditional IRA to a Roth IRA.
Converting a traditional IRA to a Roth IRA typically means paying significant taxes, but making a charitable contribution can help offset that income. This strategy may work if you already donate regularly to charity, have sufficient non-retirement assets to pay the cost of the conversion and would consider making a larger-than-usual charitable donation to Heart of Florida United Way.
PLEASE NOTE: THIS SHOULD NOT BE CONSTRUED AS PROFESSIONAL FINANCIAL ADVICE. CONSULT WITH YOUR FINANCIAL AND/OR TAX ADVISORS PRIOR BEFORE MAKING ANY DECISIONS.
