November 30, 2022 | Article | 5 min Personal insights
Your financial goals may (and should) include giving to the causes nearest and dearest to your heart. Let’s unpack some actionable strategies you can employ to reduce your taxes while helping those in need.
Let’s unpack some actionable strategies you can employ to reduce your taxes this holiday season while helping those in need.
The IRS Recommends Charitable Contributions
While you might picture the IRS as Ebenezer Scrooge, they do recommend charitable giving to save on your taxes. The IRS provides plenty of information regarding deductions, limitations, and qualified charities, making it easy for you to donate and save.
Even as we move out of the Covid-19 pandemic, the IRS still encourages people to continue donations to charitable causes due to increasing economic need. Inflation, interest rates, and shortages remain top-of-mind for many Americans in need.
Generally, the amount taxpayers may write off is limited to 60% of their adjusted gross income (AGI).
Qualified contributions (QCs) are not subject to this limitation—you may deduct such contributions up to 100% of your AGI. Meanwhile, corporations can deduct QCs up to 25% (up from 10%) of their taxable income, and any overages of that amount can carry over to the next tax year. These increased limits are partly thanks to pandemic relief laws still in effect.
With all that said, here are some other year-end charitable giving options to consider.
Complex Asset Donations
Donating to charity usually sparks thoughts of generous checks and appreciated securities. However, C-suite executives, charitable investors, and business owners may be more interested in donating privately-held assets, including C and S-corp stocks, LLC interests, or limited partnerships. These privately-held complex assets may be a tax-efficient solution for your year-end charitable giving.
Your DAF assumes responsibility for liquidating complex assets (anything other than cash or publicly traded securities) following all IRS regulations. This allows operating charities to focus on what they do best rather than dedicating time and resources to liquidation.
By donating a complex asset, such as real estate, you become eligible for tax deductions based on the fair market value of that asset. When the DAF sells the asset, capital gains and net investment income taxes may also be waived. Your year-end charitable donation goal is to ensure your favorite organizations receive as much money as possible. A DAF (compared to a private foundation) is the most efficient way to achieve that goal.
Qualified Charitable Distributions (QCD) From an IRA
Those aged 70½ or older can leverage qualified charitable distributions (QCDs) from their taxable IRA instead of taking their required minimum distribution (RMD) up to $100,000. If you don’t have many itemized deductions or are nearing the deduction limit, QCDs may be appealing. You’ll never report a tax-free QCD as income or a deduction; they don’t count against your charitable limit either.
Let’s say you have to take your RMD, but you don’t need the money, and you face increased income tax liabilities by taking it. A QCD may be the answer you’re looking for to leverage tax savings and see charitable results. You have to take the money out, so you might as well donate it to a good cause while saving on taxes.
Couples filing jointly—where both people own an IRA—
can exclude up to $200,000 from their income
if they donate to charity using QCDs. That money must be sent directly from your IRA to an eligible charity. If you withdraw and contribute after, the funds won’t qualify as a tax-free QCD.
Plan Your Giving Contributions Today by Contacting a Local Banker
With proper planning and sound advice from a trusted financial partner like Minnesota Bank & Trust, a division of HTLF Bank, you can leverage those donations to decrease your taxes while still supporting the organizations you care about.
The material was prepared for informational purposes only, and is not intended to provide and should not be construed as accounting, legal or tax advice. The information is believed to be accurate, but is not guaranteed as to accuracy or completeness. Products offered through Wealth Advisory Services and Heartland Retirement Plan Services are not FDIC Insured, are not bank guaranteed, and may lose value.