By: Jovan Johnson, MBA, CFP®, CPA/PFS

“We make a living by what we get. We make a life by what we give.”

―Winston S. Churchill

Do you want to live more abundantly and give more generously? Giving to others is a very fulfilling act. There is a direct correlation between giving and building wealth. The more we give from a place of abundance, the more we receive. There are many ways to give back in a tax efficient manner! However, to take advantage of these tax benefits, you must choose to itemize your deductions on your tax return. Below, I will discuss three common ways you can reduce your taxes while giving to others:

1.) Cash

The easiest way to give to charities is just to give cash outright. This may mean writing a check, wire, or even direct deposit to your charity of choice. One thing to keep in mind when giving cash is to make sure you keep track of your tax receipts received by charities. This acknowledgement of your gift will help during tax time when you are gathering your tax-related documents. When gifting cash, you may claim up to 60% of your adjusted gross income as a tax deduction on your federal income tax return.

Individuals can elect to deduct donations up to 100% of their 2020 AGI due to the CARES ACT (up from 60% previously). This new 2020 deduction is only for cash gifts that go to a public charity. The higher deduction does not apply to donations made directly to a donor-advised fund.

2.) Long-Term Appreciated Securities

It is true that donations made by cash or check are the most common methods of charitable giving. However, you are also able to donate long-term appreciated securities, which may include stocks, bonds, or mutual funds. Donating appreciated securities can be very tax efficient. You may claim the fair market value up to 30% of your adjusted gross income (AGI) as a tax deduction on your federal income tax return.

A huge tax benefit is that there are no capital gains taxes owed when the securities are donated.

You may donate other types of securities, such as restricted or privately traded securities, however, additional requirements and limitations may apply for them to be deductible.

3.) Donor-Advised Fund

Think of a donor-advised fund like a personal charitable savings/investment account. Whether you choose to donate cash equivalents, stock or other appreciated assets, a donor-advised fund is a great way to make a donation and qualify for a tax deduction. If you are like me, you get annoyed with writing various checks to multiple charities while trying to keep up with receipts. Well, luckily with a donor-advised fund you can make a single donation to an account at a sponsoring organization like Fidelity Charitable.

You are able to receive an immediate tax deduction, while enjoying the freedom and flexibility to recommend grants to eligible charities you care most about. As an added benefit, the fund may also be invested for potential growth, possibly resulting in even more money for charity.

Why not create a family tradition centered around giving back to charitable organizations you care deeply about, in a tax-advantaged manner?

Bonus:

Keep all of your receipts for any charitable contributions you make during 2020. When you file your 2020 tax return, take advantage of the $300 dollar above-the-line deduction ($600 if married filing jointly) for charitable contributions, if you claim the standard deduction. Normally, most of us aren’t able to claim our charitable contributions anymore as a tax deduction due to a high standard deduction. This is a great benefit that could be worth up to $111, depending on your marginal tax bracket. Make sure to take advantage of “all” the benefits included in the CARES act in response to the COVID-19 outbreak.

Key takeaways

  • If you itemize your deductions, charitable donations may decrease your tax bill
  • While donations made by cash or check are the most common methods of charitable giving, donating long-term appreciated securities may have attractive tax benefits.
  • Establishing a donor-advised fund (DAF) can be an effective way to give in a tax efficient manner.
  • Before undertaking any strategy, please consult your legal, tax, or financial advisor.

Donating to our favorite charities provide us with mental, emotional, social, and physical benefits, but also included are financial benefits. The IRS rewards us for giving back and donating to qualifying charities, through tax benefits. It is a blessing to be a blessing to others.

 

Disclosures

None of the information provided is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Piece of Wealth Planning LLC does not promise or guarantee any income or particular result from your use of the information contained herein.