3 ways to take advantage of tax deductions and increase charitable giving
This holiday season, as we create fond memories with our families, it can also be the time when we look for ways to give back to others. Understanding the tax benefits available could be an incentive to give more to our favorite nonprofit. Different tactics offer different benefits, so let’s take a look at three ways you can save money on taxes and provide much-needed support to your favorite charities.
Cash donation. Send a gift to the organization of your choice before December 31st. Be sure to keep your void check or credit card receipt as proof of your donation. Often the organization will send you a receipt as well. If you are contributing $ 250 or more, you will need this receipt or some other form of written certification from the charity.
The CARES law passed in March 2020 created an improved temporary tax deduction for charitable cash donations of up to $ 300 for single or married filers. In 2021, Congress extended the delisting and raised it to $ 600 for married filers. You don’t need to itemize your deductions to take advantage of this benefit. Listing occurs for taxpayers who have deductions that total more than the standard amount. For 2021, the standard deduction is $ 12,550 for single taxpayers and $ 25,100 for married taxpayers filing jointly. If you make a charitable contribution of more than $ 300 / $ 600, you will only be able to deduct the full amount of your contribution if you itemize the deductions on your 2021 taxes and do not take the standard deduction. If you itemize, the CARES Act allows a charitable cash contribution of up to 100% of Adjusted Gross Income (AGI) for 2020 and 2021. Previously, the maximum was limited to 60% of your AGI.
Appreciated assets. Offering stocks or other investments that you have owned for more than a year and which have unrealized gain is an often overlooked strategy. This trend is popular this year and all years when stocks, real estate and other assets have appreciated rapidly. Your charitable donation deduction is the fair market value of the asset on the date of the donation, not the amount you paid for the asset. Hence, you avoid having to pay capital gains taxes on appreciation. However, avoid giving investments that have lost current value. It is best to sell that asset first and then donate the proceeds, which allows you to claim both the charitable deduction and claim the capital loss.
Capital gains tax rates are different from regular income tax rates. If you have held an asset for more than 12 months and sell it, any gain is considered a long-term capital gain. If you are in the 12% tax bracket or below, your capital gains tax rate is 0%. If you are between the 22% and 35% bracket, your tax rate is 15% on your capital gains. If you are in the highest tax bracket, the rate is 20%. If you sell an asset that you have held for less than 12 months, you will pay regular income taxes on that gain.
Qualified Charitable Distribution (DCQ). If you’re over 70 and a half, you can use funds from your traditional IRA or other pre-tax retirement accounts to contribute to your favorite charity and pay no taxes. Amounts up to $ 100,000 can be transferred tax free directly to a charity. The distribution remains outside of your reportable taxable income for that year and you do not report your charitable contribution on your tax return. If you are 72 or older, using this method may also meet all or part of your Minimum Distribution Required (RMD). This is a great option for those who want to improve their charitable giving, not pay tax on that donation and still benefit from a standard deduction.
As the year draws to a close and we look back on the benefits we may have experienced throughout the year, helping others can allow us to share some of what we have earned. This charitable giving philosophy can lead by example and provide a valuable lesson in life for the next generation. The effects of having the next generation or even several generations witness the spirit of generosity at work are incredible. If we also reduce our tax burden, it is even better!