It’s near the end of the year and you’re calculating how much you’ll have to pay the IRS when you file your tax return for 2024. What can you still do before the end of the year to cut your tax bill? There are several possibilities for people who are charitably-minded.
Appreciated assets
If you itemize deductions on your tax return instead of taking the standard deduction, donating appreciated assets can help you increase your giving in two ways. First, you can eliminate the capital gains tax you would incur if you sold the assets yourself and donated the proceeds. The capital gains rate can be as much as 20% plus the additional 3.8% Net Investment Tax.
Second, you can claim a fair-market-value charitable deduction for the tax year in which the gift is made.
Tax-loss harvesting and a cash gift
If you have securities in your portfolio that are worth less than you paid for them, you can
- Sell those securities that are underwater
- Donate the cash from the sales to charity
- Use the capital losses to offset any capital gains that year
- Claim a charitable deduction for donating cash from the sale of securities
If capital losses are greater than capital gains, the net remaining loss can be carried forward to offset capital gains in future years.
Private business interests
Besides publicly traded securities, you may own interests in a C-Corporation, Limited Partnership, or Limited Liability Company. Giving a percentage of private business interests can be beneficial if you’ve held them more than one year and if they’ve appreciated significantly. It can also eliminate long-term capital gains you would have to pay if you sold the interests and then donated the cash. If you get a qualified appraiser to determine the fair market value of the private interests, you can claim the gift as a tax deduction.
Restricted stock
Restricted stock is shares issued to employees as part of their pay package. The employee doesn’t own the shares until they met certain conditions, such as working for the company a specified number of years or having met certain production goals. However, the company’s general counsel can remove the restrictions and the stock can be donated to and sold by a charity.
Donation of restricted stock allows the donor to eliminate long-term capital gains on the appreciation and claim a charitable deduction.
Bunch multiple years of charitable contributions into a single tax year
Let’s say you don’t have enough deductions to itemize this year and have to take the standard deduction. You’d miss out on the deductibility of your charitable donations. But it may be beneficial to combine, or bunch this year’s donation and next year’s so you can itemize, and then take the standard deduction next year. The bunching strategy, using both the itemized deductions and the standard deduction may create a larger two-year deduction that two separate years of standard deductions.
Name a charity as the beneficiary of your IRA
If you name anyone other than your spouse as beneficiary of your IRA, that beneficiary has to pay income taxes every time they withdraw money from the inherited IRA. For that reason, many people choose to name a charity as beneficiary. Unlike non-spouse beneficiaries, qualified charities do not have to pay taxes on IRA distributions, so the entire amount goes to the charity.
Qualified Charitable Distribution (QCD)
Beginning at age 70 ½, you can make Qualified Charitable Distributions from your traditional IRA to 501(c)(3) tax exempt organizations. You can give up to $100,000 each year. If you’re married, your spouse can also give up to $100,000.
QCDs must be sent directly to the qualified charity by the custodian or trustee of your IRA. The distributions cannot be made to donor advised funds, supporting organizations, or private foundations. They may not be used to fund life-income gifts such as charitable gift annuities, charitable remainder trusts, or pooled income funds.
It’s a way to donate to charity, meet some or all of your required minimum distribution and not pay taxes on the distribution.
Trust options
For some, a more formal giving strategy is appropriate using a trust.
Charitable Remainder Trust (CRT)
If a giver also wants a stream of income for themselves as well as a gift to charity, they may use a charitable remainder trust. The donor makes an irrevocable gift to the trust. In return, they receive income for a certain number of years or for their lifetime. At the end of the term, the charity receives whatever is left in the CRT.
Charitable Lead Trust (CLT)
A charitable lead trust is the reverse of a charitable remainder trust. The donor makes an irrevocable gift to the CLT. A charity receives an income stream for a certain number of years. Then what’s left is distributed to those named as beneficiaries of the CLT.
Donor advised fund (DAF)
A donor advised fund is actually a charity itself. A donor makes contributions to the DFA and receives a tax deduction in the year given, but the money doesn’t have to go to charitable organizations in the year given. The assets can be invested for growth and the donors can decide at a later time what charities the DFA will contribute to and in what amounts.
If you don’t have time to set up a charitable trust this year, you have plenty of time to get one set up before next tax season.
Tax deduction considerations
Generally, tax deductions for charitable giving are only available if you itemize deductions, which are limited to 50% of adjusted gross income (AGI). The limit increases to 60% of AGI for cash gifts, while the limit on donating appreciated non-cash assets held more than one year is 30% of AGI. Contribution amounts in excess of these deduction limits may be carried over up to five subsequent tax years.
Disclaimer
This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors, all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investment Partners at 1-888-777-0970 or email us at [email protected].
