How Charitable Giving Actually Saves You Money
Updated: Apr 21
Philanthropic giving is a powerful way to support the causes and issues that matter the most to you. Supporting charities and organizations that make a difference allows you to invest in a way that supports your local community or the broader world, providing much-needed resources for nonprofit organizations.
There’s another benefit to charitable giving. It can provide significant relief for you on your taxes.
Charitable giving can be a strategic part of a healthy financial plan. Here is a closer look at some of the ways that charitable giving can save you money.
Take Your Tax Deductions
If you itemize on your federal tax return, charitable deductions continue to qualify under the Tax Cuts and Jobs Act of 2017. Under the new law, there is no limit to the total itemized
deductions you can claim, meaning you can get full credit for your charitable contributions.
The new tax laws also increase the limit on cash contributions to 60 percent of your adjusted gross income (AGI), up from 50 percent under previous tax rules.
Consider Non-Cash Assets
You could choose to make a charitable donation by selling non-cash assets like stocks and bonds and donating the proceeds. However, it may be more advantageous to donate the assets directly to the charity instead.
There are two major benefits to this approach, as long as you’ve held the assets for more than a year. The first is you’ll be able to claim a deduction for the full fair market value of the assets. The second is that neither you nor the charity will be taxed on any gains.
One other advantage. If you donate stock that has significantly appreciated, you can purchase more and reset the cost basis at a higher amount.
Manage Minimum Distributions
If you’re 72, the IRS requires you to make a minimum distribution from traditional retirement accounts, such as a 401(k), 403(b) or IRA. Taxes must be paid on these withdrawals.
If you find you do not need these required minimum distributions for living expenses, you can transfer up to $100,000 per year directly to an eligible charity without incurring any income tax. You can even contribute the $100,000 per year even if your required distribution is less than that amount.
Explore Donor Advised Funds
Donor Advised Funds (DAFs) are a charitable giving vehicle designed to reduce your tax burden. It’s simple. You open a DAF using cash or securities. The account grows tax-free and is dedicated to supporting charities you care about.
Any contributions to the fund are fully tax-deductible in the year you invest. Then, when you have a specific charitable gift, you want to make to an IRS-approved charity, you recommend to the fund that it grant the amount you wish.
Convert Your IRA
When you convert a traditional IRA to a Roth IRA, you avoid paying future taxes on the principal or growth. You will pay taxes on the IRA amount today but can then grow the ROTH IRA tax-free. If you plan to convert, you can also schedule a larger-than-normal contribution to a charity and use non-retirement assets to pay for the conversion.
Strategize with a Trusted Financial Advisor
Managing your money to allow for long-term growth and to support the important causes in your life is important. It often means working with a trusted financial advisor like Solas Wealth, which provides wealth management services for high-net-worth individuals. Learn more about how Solas Wealth can help protect and grow your assets, reduce taxes and manage charitable giving.
Plan Your Giving
You can use a charitable donation in many ways to maximize tax savings. If you are planning to have higher tax brackets in 2022 than they were in 2021, you could wait for the deduction in 2022 to become higher. The large charitable contribution should also be planned carefully so that the tax deduction can be maximized and the expense is minimized.
If you donate a total of $25,000 to charity causes and have a total of $5,500 in your account you will receive a deduction. This is a great tax benefit to take advantage of especially if you frequently donate to charitable organizations.
Donate Household Goods
You could also donate household items to a good cause and clean up the basement while saving tax revenue. Some charities or churches offer clothing and household items to donate. It is slightly less restrictive in the case of cash donation when donating to charity.
Your donations may be credited with their fair market value at the time of gift, and not their actual purchase value. If a donation is under $250, the donation must be signed and prepared along with an item list showing their fair market value.
Track Your Carryforwards Carefully
If your donation cannot be deducted as part of your annual gross taxable income, you are able to continue your donation at the current rate of 5 percent. After that time, the money will expire.
Keep tax deductible carry-forwards trackable to make it easier for you to use them as soon as possible. If there is a danger of losing balance carryforward, donate the last year and start using the older ones first. I'm not gonna go back.
Tell me the tax bracket and how does it affect my deductions?
The federal tax bracket is determined according to taxable wealth and filing status. All taxpayers have their own tax brackets, although this system has several tiers. The taxation of some parts of your income will be 12%, while the next portion will be 12% and the other 10%.
These are termed marginal tax rates, meaning how much tax is paid for each tax bracket for which you qualify. It is basically the percentage derived from every dollar that is taxed over your income threshold. Then it means a taxpayer has a tax bracket technically different than the other tax bracket.
Deducting charitable donations from taxable income
The charitable donations deduction can help reduce taxable income for charitable contributions. To claim your deductible, you will need a 1040 Form which is used to file individual income taxes. In addition, you need to add a deduction on Schedule A of Form 10.
If you choose the itemization deduction option for 2018, there is still a rule regarding whether or not you can or cannot deduct a charitable donation. Understanding these requirements will help increase deduction rates and reduce taxable income & capital gains tax.
For most Americans the standard tax deductible donations are better
Is this an issue? Is anyone using that information to make a profit? The biggest reason for this was the standard tax deductions. It's the IRS' goal to make tax filing easier and faster. You simply choose what's most convenient - either a standard deduction or total of things which can be deducted, such as charity and mortgage interest.
Getting a tax deductible item is difficult, but a lot easier if you are able to find a list of all the expenses you have. For individuals, the average tax rate is $12,550.