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Bernicke Wealth Management’s President and Executive Wealth Manager, Ty Bernicke, CFP(R), is situated in Eau Claire, Wisconsin.
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Poor charity giving decisions are one of the most typical tax blunders that our wealth management firm sees on a regular basis. Many folks may write checks to their favorite charity and then report the information to the IRS when tax season arrives. Unfortunately, this basic method may result in missed tax savings. Today, I’m going to provide two ideas that will assist you.
Donate Your Appreciated Assets
Many people choose to write cheques from their bank accounts to donate to their favorite charity. If you itemize deductions on your tax return, you may be eligible for a tax break. Other approaches, on the other hand, may bring significant tax benefits.
You may be able to give an appreciated investment straight to your charity if you have one. You can still get the same tax benefit as if you wrote a check if you donate an appreciated investment, plus you avoid future capital gains taxes on the appreciated investment. Because charities do not have to pay taxes, they will be able to spend the entire amount of the appreciated investment donation. When opposed to receiving a check, this technique ensures that the charity receives the same amount. Furthermore, if you can itemize deductions, you can avoid capital gains tax and deduct the donation.
Stacking for a Good Cause
Because they do not have enough deductions to itemize their deductions, many persons who donate to charity take the standard deduction when filing their tax returns. Mortgage interest, personal property taxes, charitable donations, and a variety of other expenses are examples of charges that can be deducted as itemized deductions. A family would itemize deductions only if the total of all of their itemized deductions exceeded the standard deduction. Unfortunately, this does not happen for many people, and they do not obtain any tax benefits as a result of their charitable contributions.
ADDITIONAL INFORMATION FOR YOU
Increasing your itemized deductions is one solution to this problem. Prepaying your philanthropic donations into a donor-advised fund, for example, could help you increase your itemized deductions. A donor-advised fund is similar to a charitable investment account in that it allows you to make a one-time donation while earning an instant tax credit. Combining multiple years’ worth of donations into one year can boost a family’s itemized deductions above the standard deduction threshold, resulting in a tax break that would otherwise be missed. Our firm refers to this method as “charitable stacking,” because it involves combining multiple years’ worth of gifts into a single year.
While you wait to donate the money to a donor-advised fund, it can be spread into a range of other investment opportunities. Additionally, you will be able to contact your donor-advised fund team each year to inform them of the amount and names of the charities you choose to support for the coming year.
Combining the charity stacking strategy with the giving appreciated assets method can increase the benefits of the charitable stacking strategy. Instead of just writing a check to the donor-advised fund, this can be accomplished by investing numerous years’ worth of philanthropic donations into a donor-advised fund with an appreciated investment. Combining the two tactics has two advantages: you avoid paying taxes on the appreciated investment while also being able to deduct the amount on your tax return. Consider adopting this technique in years when your tax bracket is higher, since this will increase the value of the deduction from the plan.
How Could This Play Out?
I’ll use a hypothetical example to demonstrate the power of implementing these strategies:
Assumptions: Darin and Kristie donate $4,000 each year to various charities by sending checks. Because their itemized deductions do not exceed their standard deduction, they have been unable to obtain any tax benefit for their annual donations.
Darin and Kristie own a stock that has gone from $100 to $20,000 in value. They have a total taxable income of $150,000, putting them in the 24% tax bracket.
Darin and Kristie are almost over the line in terms of itemizing their deductions.
We’ll assume that no special legislation, like as the Covid-19 stimulus plan, provides for increased charitable deductions.
Darin and Kristie decide to make their usual $4,000 donation, as well as an additional $16,000 in four years’ worth of donations to a donor-advised fund. They opt to use their valued shares instead of writing checks to their charity and donor-advised fund.
Darin and Kristie were on the verge of itemizing their deductions last year, so the extra $16,000 deduction this year might save them $3,840 in taxes by avoiding paying 24 percent tax on the entire $16,000 given to the donor-advised fund. They would save future capital gains tax on the appreciation of their stock, which may save them $2,985 at today’s capital gains tax rates, in addition to the tax savings from the deduction. So the overall tax savings would be $6,825, consisting of $3,840 in increased tax deductions and $2,985 in capital gains tax savings. Darin and Kristie would have received no tax savings if they had continued to donate in the same manner as before.
Summary
If you donate to charities on a regular basis, you can use a variety of ways to save money on taxes. Even if you work with a CPA, the responsibility for implementing these methods falls on you. This is because your CPA may not collect information on the types of investments you own, making it impossible for the CPA to determine which assets are the most beneficial to donate. I hope the techniques I’ve shared with you provide you the foundation you’ll need to put your philanthropic tax-saving approach into action.
The views expressed in this material are for informational purposes only, and are not meant to provide particular advice or recommendations to any individual. This information is not meant to be a replacement for personalized tax advice. We recommend that you speak with a certified tax professional about your individual tax concerns.
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