Updated: Dec 20, 2021
This is the time of year when thoughts turn to helping others in need, whether with monetary donations, volunteer time, or charitable legacy planning. While you are making your charitable giving plans, consider these tips to maximize the tax benefit of your good deeds:
Rather than donating cash to your favorite charity, donate appreciated investments instead. Perhaps you bought stock many years ago that is now worth much more than you paid for it. If you give the stock to the non-profit, and they cash it in, they don’t have to pay the tax on the capital gain.
If you are taking Required Minimum Distributions (RMD’s) from your IRA’s, and in turn writing a check to your church or charity, wait a minute! You need to know about the Qualified Charitable Distribution rules where the IRS allows you to donate your RMD’s (any portion up to $100,000) directly to your non-profit, and not count that RMD as income on your tax return. Who knew the IRS could be so kind? And if your financial advisor hasn’t told you about this little gem, you might need to reassess the value your advisor is bringing to the table.
Perhaps you would like to leave some money to your church or charity in your will. Great idea! However, instead of gifting through your will, designate your non-profit as a beneficiary on your IRA. Why? Because IRA assets are taxable as ordinary income to your heirs, but not taxable to your non-profit of choice. Let your heirs inherit your after-tax investments instead.
Maybe you like the idea of leaving some of your IRA money to your favorite charity, but hate to think of short-changing your heirs. One solution is to use a portion of your RMD’s and buy permanent life insurance. As a result, you give those taxable assets to your non-profit and give a tax-free death benefit to your heirs. Now everyone is happy! (Except perhaps the IRS)
Tax planning and charitable giving is not just for the rich – it’s for anyone who wants to choose where their hard-earned money goes – to taxes or to charities. Give our office a call if you would like a complimentary meeting to learn more.