Written by Jamie French
The busiest time of year to donate to your preferred charitable causes is officially the holiday giving season. However, before you give this year, be aware that a thoughtful approach to giving can increase your own financial stability and enable you to have an even bigger philanthropic influence.
You may still create your own tax-smart charitable contributions plan, even though the 2017 tax reform laws make it less advantageous for the majority of people to claim itemized deductions on their tax returns, including charitable contributions. Here are five methods to get started:
1. Decide which assets to donate—cash isn’t always the best option.
The IRS estimates that while financial assets account for 75% of charitable contributions in the United States, non-monetary assets, including as real estate, retirement plans, investment holdings, life insurance, farms, and business interests, hold 90% of the nation’s wealth. Capital gains from non-cash assets are frequently subject to high government taxes unless they are transferred to your preferred charities.
Don’t only use your bank account to make charitable contributions when you’re arranging them. Instead, list all of your non-cash assets, determine which ones may be subject to a future capital gains tax payment, and decide how you will distribute the earnings to the charity of your choosing.
2. When making charity plans, take your age into account.
It is important that your charity giving and tax strategies complement each other more as you age. The IRS normally permits a larger standard deduction for individuals 65 and older, which could be sufficient to remove you from the itemized deduction category. However, the IRS permits you to donate up to $100,000 of your annual individual retirement plan (IRA) payouts to charity tax-free if you are 70.5 years of age or older. Married couples who each have their own IRA may choose to donate up to $100,000 annually to charitable causes. Qualified charitable distributions (QCDs) are the term used to describe these transfers. Once you reach the appropriate age, the IRS even permits QCDs to be counted against your annual required minimum distribution.
Your Medicare rates may potentially be lowered by charitable contributions. Your Modified Adjusted Gross Income (MAGI) from the previous two years is used to calculate your Medicare Part B and Part D premiums. You can lower your MAGI by making some charity contributions now, such as QCDs, which could lower your Medicare premium in two years and beyond.
3. Use a donor-advised fund to prepay your charitable contributions for instant advantages.
You can create a donor-advised fund, which is a charity investing account, to gradually give grants or other donations to your preferred charities. Your funds (or other assets) are irrevocable once they are in a donor-advised fund and can only be utilized for charitable purposes. The tax advantages of a donor-advised fund, however, greatly exceed the drawbacks, particularly if you’re a consistent, disciplined donor.
4. Keep in mind that the income tax deduction limits vary depending on the asset.
Your adjusted gross income (AGI), the kind of asset you contributed, and the size of your gift all affect how your deductible contributions are treated tax-wise. You can write off up to 60% of your AGI for monetary contributions to eligible charities in the 2024 tax year. The deduction cap for capital gain property and other non-cash contributions is 30% of your AGI. Contributions beyond the annual restrictions based on your AGI are allowed to be carried over by the IRS.
Note that deductions are not available for contributions to political campaigns, people, or civic leagues (registered as 501(c)4s). Furthermore, you are only able to deduct the portion of your donation that surpasses the value of any goods or services you get in exchange for your donation.
5. Establish a three-person advisory team for charity planning
It can be difficult to create a charitable donations plan that optimizes your tax advantages, as you have already realized by now. In light of this, think about hiring a certified public accountant, financial advisor, and estate lawyer to assist you in navigating the many complexities of charity giving.
At Advent Partners, a financial planning company with locations in Gettysburg and Camp Hill, Jamie French holds the position of managing partner.
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