Americans give more than $557 billion to charity every year. Without a doubt, we are a caring and compassionate people. But whether you itemize deductions or use the standard deduction, it may be possible to give even more by doing some tax-smart planning using IRS allowed provisions in the tax code. Let’s start with ideas for people who itemize deductions.
Rebalance your portfolio
Portfolios can get out-of-balance for a variety of reasons but rebalancing often involves selling appreciated assets that have grown past their target allocations, and buying more of the positions that are below their target.
A possibility for reducing the tax liability from the sale of appreciated assets is a strategy known as the part-gift, part-sale approach. You donate to charity long-term appreciated assets with a value equal to the capital gains generated when you rebalanced your portfolio. Then you take a charitable deduction for your donation. The gifting part of this strategy can be implemented using a donor-advised fund.
Offsetting tax liability on a Roth IRA conversion
Converting a traditional IRA to a Roth IRA provides tax-free growth, tax-free withdrawals, and no required minimum distributions (RMD), but the conversion does create a tax liability. What can you do? Make a charitable contribution of long-term appreciated non-retirement assets in the amount converted and claim an itemized charitable deduction.
Offsetting tax liability on retirement account withdrawals
Anytime you take money out of your IRA you will have to pay taxes. The IRS requires you to begin taking money at age 73 in the form of required minimum distributions (RMD). If you withdraw money before age 59 ½ you have to pay the taxes plus a 10% IRS early withdrawal penalty. You can offset some or all of those taxes with itemized deductions to qualified charities. If you’re age 70 ½ or older you can make charitable donations out of your traditional IRA called qualified charitable distributions (QCD) up to an annual maximum set by the IRS. You don’t get a charitable deduction for the QCD, but you don’t have to pay taxes on it either.
Tax-loss harvesting and a cash gift
Tax-loss harvesting is selling non-retirement assets at less than you paid for them. Here’s how this strategy works:
• Sell the investments at a loss
• Give the proceeds of those sales to charity
• Apply the capital loss against any capital gains you have for the year
The IRS allows you to deduct losses up to $3,000 more than your capital gains. If you have unused losses, you can carry them forward into futures years until they are used up.
Let’s shift gears. Suppose you don’t have enough deductions to do an itemized tax return and you take the standard deduction. There are charitable strategies you can use.
Qualified Charitable Distributions (QCD)
You can make qualified charitable distributions, just like people who itemize, and the rules are exactly the same. You have to be age 70 ½ or older to be eligible. The money has to come from a traditional IRA. QCDs are not allowed from retirement accounts like 401(k)s, 403(b)s, etc. You can give up to the IRS annual maximum, which changes every year based on inflation.
• The QCD has to be sent directly to the charity.
• Warning. If you liquidate the donation, take the cash and then give it to the charity the IRS classifies that as an IRA withdrawal and you will have to pay taxes on it.
• The QCD is per person, so if you’re married, your spouse can give up to the annual maximum as well.
• And while you don’t get a tax deduction for the charitable contribution, you also don’t have to pay taxes on it.
Name a charity as beneficiary of a retirement account
Even though traditional IRAs and retirement accounts are tax-deferred accounts, individuals who inherit them still have to pay taxes on what they receive when they take distributions. Charities are exempt from that rule. So, another strategy for charitable giving when you take the standard deduction is to name a charity as beneficiary of your tax-deferred account.
Charitable bunching
Suppose your deductions for this year will be too low to itemize and you’ll have to take the standard deduction. Bunching may help.
Bunching is combining the charitable donations you would give over the next 2 or more years into a single year. By doing so you might be able to itemize deductions this year and take the standard deduction next year, ending up with a larger two-year deduction than would be possible by claiming two years of standard deductions.
Maximizing charitable impact
For some, giving the most possible to charity is the number one objective and deductibility comes second. In that case, here are a couple of possibilities to consider.
Donate appreciated non-cash assets
For most of us, the first thought about charitable donations is to give cash or traditional assets like stocks, bonds or mutual funds. But charities can also benefit from gifts of non-cash assets. For the giver, donating appreciated stock, private business interests, real estate, or other non-cash assets that have been held for more than one year has multiple benefits.
• First, it generally eliminates the capital gains tax you would incur if you sold the asset and donated the proceeds.
• Second, the charity could receive as much as 20% more by receiving the non-cash asset and selling it, because the charity doesn’t pay taxes on the sale.
• Third, if you itemize deductions on your tax return for the year you give the gift, you can claim a charitable deduction for the fair market value of the donated assets.
Donate life insurance
Life insurance is intended to provide money at your death for expenses that were dependent on your income; things like the mortgage, college education for the kids, outstanding debts, etc. But what if those financial issues no longer exist and you still own the life insurance? You can donate insurance policies to charity.
You can donate the policy during your lifetime. The charity can then sell the policy and receive cash, and you can claim a charitable deduction for the value the charity received.
Another strategy is to keep the policy and name a charity as the beneficiary. At your death the charity receives the death benefit and the insurance proceeds are removed from your estate. Insurance proceeds can face federal estate taxes from 18% to 40% depending on your gross estate.
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].
