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  • Poterack Capital Advisory

Do Good & Save Taxes

With the Tax Cuts and Jobs Act in effect 2018 – 2025, many itemized deductions were eliminated or capped. Additionally, the standard deduction went up substantially. This has led to far fewer taxpayers benefitting from itemizing their deductions.

If you do not itemize your deductions, then your charitable contributions are providing no tax benefit for you.The primary reason for giving to charity is to support the charitable organization. If you also get a tax advantage, this is a win for you! Here are three strategies to consider.

A: If you are 70 ½ or older, you may give up to $100,000 to charity directly from your Traditional IRA without any taxes payable on those IRA distributions. The amount you give to charity in this way also counts toward your Required Minimum Distribution amount, if you have one. This is may be the most tax-efficient way to give to charity and is too often missed by consumers and their tax advisors.

B: If you have appreciated stocks or other investments in an after-tax brokerage account, you can give a charity a “Gift In Kind” (GIK). Let’s say you invested $5000 in ABC stock which is now valued at $15,000. If you sold the stock, you’d likely pay capital gains tax on the $10,000 profit. However, if you gift the shares of ABC stock directly to the charity, then the charity can sell without taxation. You get the same $15,000 itemized deduction as if you gifted cash, but pay no tax for selling at a profit.

C: A Donor Advised Fund (DAF) may be a great fit for those that give to charity annually but do not get much or any tax advantage in doing so. Let’s say you intend to give $15,000 to charity on an annual basis, but your itemized deductions do not surpass your standard deduction by much or at all. You may establish a DAF and contribute $75,000 in a single year, allowing you to take advantage of that amount counting as an itemized deduction. You may then give to charities out of your DAF in future years as you see fit, or the same $15,000 per year. You are not committed to specific charities. You may invest the money in your DAF like any other account and all growth is income tax free! You very likely save a lot more on taxes over time than making annual charitable contributions without the DAF. Additionally, you may reduce your taxable income so that a coordinated Roth conversion makes sense!

You may also combine “B” and “C” above by funding the DAF with appreciated securities. It all starts with your charitable intent and then let’s discuss how to maximize the tax efficiency of your charitable dollars. Get a second opinion on your wealth management and tax mitigation strategies!

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