Charitable giving is a worthwhile endeavor. It’s good for the community. And it benefits the giver in more ways than one. Beyond the legacy and the sense of accomplishment of giving to charity, it can be a solid investment strategy from a tax perspective. Here is how to reduce taxes by making charitable donations.
Giving to charity allows you to bypass capital gains – earnings you receive from investments like stocks, real estate, or business interests. So by donating a portion of these assets to what you’re passionate about, you avoid paying taxes on that portion. But that’s not all.
You also enjoy a charitable income tax deduction. For instance, if you have bought shares of Google stock (before it rises in value by 10 percent) and donate it, you won’t have to pay taxes on the gain. In addition to deducting the fair market value of your donations from your income tax, you can also reduce capital gains tax by up to 30 percent.
Just because you do not own a stock or real estate property doesn’t mean you can’t benefit tax-wise from charitable giving. A donor-advised fund allows you to donate a sizeable amount of cash to a charity and claim a deduction against taxable income. The money is set apart, allowing you to distribute it as you wish. This strategy also works for stocks and other assets.
Through the required minimum distributions (RMDs), the government forces you to withdraw from your tax-deferred accounts (premiums and contributions made with pre-tax dollars). The reason for this is to tax your withdrawals. However, you can avoid paying both the income and capital gains tax by donating your RMDs.
Through a QCD (qualified charitable distribution), you can donate up to $100,000 of your RMDs tax-free. Your QCD represents your total tax savings if you were going to give to charity anyway. Two, by avoiding paying income and capital gains on your retirement money, your income and premiums remain low, which is good for Medicare purposes.
Another way to save on taxes through donations is by setting up a trust. Charitable trusts allow you to enjoy tax breaks on your income. If you have an annuity (payouts by an insurer), you can arrange to get income for life and the remainder to go to charity when you die. You can fund a charitable trust using assets or cash to avoid the taxes due.
If you were to leave your individual retirement arrangement (IRA) like life insurance to your beneficiary, they’d owe taxes. A charity organization, however, wouldn’t. So you may donate your IRA money and leave your beneficiaries cash from your checking or savings account since they do not incur taxes.
Individuals and companies can donate in cash, financial assets, or other noncash assets like artwork, clothing, and real estate. However, regulations governing types of contributions set limits - with certain forms of donations facing more restrictions than others. What’s more, some get better tax breaks than others. Generally, you can donate up to 30 percent of AGI (adjusted gross income) of the appreciated property to an organization.
