Giving builds positive change in people. It can also help lower your tax bill.
Giving creates positive change in people and communities. It sustains a multitude of worthwhile organizations. It launches innovative new programs and services. Plus, it makes us feel good and is a cause for celebration.
At year-end, when family get-togethers and exchanging gifts occupy much of our thoughts and time, taxes are usually the last thing on our minds. But some year-end charitable giving strategies can help lower your tax bill. Several opportunities may significantly lighten your income tax burden while supporting a favorite charity, depending on your tax bracket and whether you itemize.
Electing for Charitable Contributions in High-Earning Years
It generally makes sense to try to make multiple or more sizable charitable contributions in the years you have the highest income or highly appreciated securities. You may even consider making advance contributions if your income is expected to drop in the next year or two. Because everyone’s tax situation is unique, you should discuss your gift plans with your financial advisor and tax professional before making any contributions.
Consider this example:
- Tax bracket 25%
- Itemize Yes
- Gift $10,000
- Tax savings $2,500
Explore the ways you can reduce your tax burden by making charitable contributions
One way to give that’s close to home is through a donor-advised fund administered by Raymond James Charitable. Established in 2000, this public charity simplifies giving by making grants to charitable organizations on your behalf. Because it is a 501(c)(3) public charity, you receive an immediate tax deduction up to the maximum allowed for your contribution.
Second, if you contribute securities held for more than one year, you avoid paying long-term capital gains tax on the appreciated portion of their value. Gifts can also reduce estate taxes since your estate’s value has decreased equal to the amount donated.
Through the fund, you can request grants to specific, qualified charities at any time. This lets you decide when and how much you want to donate to a particular charity.
Advantages of Giving in a Donor Advised Fund:
- Receive immediate tax deductions
- Avoid long-term capital gains taxes
- Reduce estate taxes
- Most of the benefits of a private foundation but with less work
- Consolidate giving efforts that ensure a legacy for generations to come
Finally, your contributions have the potential to grow. Donations are invested tax-free in one of seven investment objectives or professionally managed accounts and may appreciate so that you can give more than the original value.
Charitable Remainder Trust
A charitable remainder trust (CRT) is an irrevocable trust that allows you to receive income and support your favorite charity by contributing cash, real estate, or appreciated stock while saving on income, estate, and capital gains taxes. There are startup costs, and an attorney is required to draft the trust.
Charitable Lead Trust
A charitable lead trust (CLT) is an irrevocable trust that enables you to regularly give money or property to a charity. Distributions can be made monthly or quarterly, for example, but no less than annually. The charitable gifts reduce the value of your taxable estate, thereby reducing the federal estate tax liability. In some cases, the estate tax may be eliminated. After a specified period or upon death, the remaining trust property passes back to you or your designated beneficiaries.
Gifts of Cash
If you itemize your taxes, you can make the most straightforward charitable contribution and lower your 2020 income taxes with a cash gift postmarked by December 31, 2020. As a result of the CARES Act, donors may give cash gifts up to 100% of their adjusted gross income. If you do not itemize, there is also the opportunity to deduct up to $300 above-the-line. However, gifts of cash made into donor-advised funds are excluded from these new CARES Act tax benefits, meaning you can still only deduct up to 60% of your adjusted gross income when giving cash to a donor-advised fund.
Gifts of Securities
While gifts of cash are simple to make and fully deductible, gifts of securities are frequently the most advantageous donation from a tax perspective. Contributing long-term, appreciated securities to your donor-advised fund allows you to avoid paying capital gains tax. Besides, you still receive an income tax deduction equal to the full fair market value of the security when it is contributed. Gifts of long-term, appreciated securities are fully deductible up to a maximum of 30%1 of your adjusted gross income.
Consider this example:
- Purchase price of stock $5,000
- Current value of stock $25,000
- Stock contribution amount $25,000
- Charitable deduction $25,000
- Capital gain avoided $20,000
Charitable giving is often more than writing a check—many factors present in your giving, like tax strategies, family dynamics, and estate planning.
We’re here to give you the support you need to live the life you want. Please reach out to your advisor or local Signature office with questions and financial needs. Wishing you the very best for the rest of the year and a fabulous 2021!
You may be able to maximize the impact of your giving and save on your tax bill, but you have to act quickly. Please contact us to discuss specific details of your financial situation.