Through the act of giving, we receive. How wonderful that this also applies when tax season rolls around. It’s that time again, so learn to reap the benefits of your tax planning initiatives!
While gathering tax documents needed to file taxes – get educated to pay fewer taxes by giving to your favorite charities. The more people know about up-to-date tax strategies related to charitable giving, the more they can provide to their preferred charitable organizations. Missions matter, so take care in selecting the right one while saving as much as possible on your tax bill.
Since Biden’s proposed Build Back Better bill was stopped abruptly in the Senate, there’s no telling what tax changes may be coming. And there’s no better time to sit down with your financial advisor, Bountiful, UT based, to plan your charitable giving for 2021 and 2022.
How does charitable giving affect taxes? Read on to find out how and apply these tax tips.
Itemized vs Standard Deductions
When filing tax returns, we have two options: Claim the standard deduction, or itemize deductions. If your total itemized deductions are greater than the standard deduction available for filing status, itemizing could reduce your tax bill.
Here are the standard deductions for both the 2021 and 2022 tax years:
Source:Nerdwallet, Jan 2022
Itemized deductions allow us to include state and local taxes, mortgage interest, charitable contributions, medical expenses, casualty losses, and a few others.
Although the vast majority of people take the standard deduction every year, a savvy tax advisor can easily crunch numbers to confirm that’s the right decision for you.
Charitable giving will only reduce your tax bill with itemization.
Plan Giving
Tax planning, as opposed to tax preparation, is needed. And charitable deductions should be included.
Instead of retroactively figuring out how much is owed, tax planning is proactive and seeks to lower next year’s tax bill. By planning forward, you will be able to seek out all potential deductions.
Tax planning is essential during political climates like this, where significant changes to the tax code are being discussed by Congress daily. Tax plans must be prepared in advance for a variety of outcomes.
Ask a financial advisor how you should best prepare for the future – starting today!
4 “Unknown” Strategies
Many people know they can deduct charitable donations from their income taxes. However, there’s more than one way to do it, and some are better than others, depending on the situation.
Knowing these strategies can help us decide how much to give, when to give, and what type of asset to give to maximize gifts and minimize taxes.
1. Combine multi-year deductions
If a person isn’t going to qualify for the necessary deductions to pass the standard deduction threshold, they can consider “bunching” several years’ worth of charitable gifts into one year.
In “bunching” years, they will itemize. In off-years where there are no charitable gifts given, take the standard deduction.
2. Long-term appreciated assets
For those who have highly appreciated assets, gifting those assets directly to their charity might be a good option. People typically won’t pay capital gains if donating long-term appreciated assets like stocks, bonds, or real estate to charity. Plus, they can take an income tax deduction for the total fair market value.
For example, if someone bought 100 shares of stock ABC two years ago for $20 per share and currently trades at $40, donating all 100 shares will give them a deduction of $4,000. The original cost of $2,000 is worth $4,000 to the charity and $4,000 in deductions – it’s a win-win.
The limit on donating these assets is 30% of adjusted gross income (AGI).
3. Estate planning
The estate tax is a federal law that dictates any estate worth more than the current year’s exemption pay tax on any value above the exemption. Currently, the federal exemption is $11.7 million, but that could potentially be reduced by the end of 2022.
Additionally, some states have their own estate or inheritance tax.
If a person has a large estate, consult with a financial advisor in Utah on how best to protect it (and how the current legislation may affect it). They will likely recommend various strategies, including giving annual gifts to family, irrevocable trusts, and charitable donations.
4. Donor-advised fund
A donor-advised fund (DAF) is an account established at a public charity. These accounts allow us to make a charitable contribution and receive an immediate tax deduction, then recommend grants from the fund over time.
If we have the money (or assets) and want to make a gift but don’t yet know where precisely it should be directed, a DAF may be the perfect solution. A DAF greatly serves those who receive a windfall of money.
How a Financial Advisor Can Help
If saving on taxes with a tax-efficient financial plan is most important, work with a financial advisor and get familiar with the tax code. They will work hard to create a dynamic tax plan and simplify it. This strategy reduces a lifetime of tax burden.
Minimizing the amount paid in taxes is one of the highest returns on investments available. The potential thousands of dollars saved annually can make a massive difference, especially if investing those new savings and giving them time to compound.
Financial advisors do this work every single day for people just like you. Schedule an appointment today and let ARS demonstrate the value they can bring to your life.
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The Takeaway
Donating to charity is a great way to combine your philanthropic nature and save money on taxes.
If you make large donations and plan to itemize, always get a receipt from the organization, both for your records come tax season, and in case you’re ever audited. Also, remember to confirm an organization’s 501(c)(3) status before making a gift that you plan to deduct.
Create a tax plan, including charitable giving, and instantly lower your tax burden. Call us now to begin: (385) 249-5652
Get your guide to proactive tax planning here!
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