Three Tax-Smart Ways to Donate Money and Reduce Taxes

• QCDs, direct contributions, and the gifting of appreciated stock are three tax-efficient options to give back.
• You must make required minimum distributions (RMD) from your individual retirement accounts if you are 72 or older (IRAs).
• One can normally claim a charitable tax deduction for the entire fair market value of the shares.

It’s that time of year again. Neighborhoods are decked out in holiday lights, customers are swarming stores in quest of must-have gifts – and financial advisers are busy assisting clients with last-minute tax planning for 2021. There are multiple ways to reduce taxes, let’s find out below.

It’s also the time of year when many charities receive the majority of their annual donations, as the holiday spirit motivates people to contribute a bit extra. As we approach the end of 2021, investors who have seen their wallets expand dramatically owing to stock market gains may feel extra charitable, especially if the pandemic’s harsh trials have opened their hearts to giving more freely.

Refer to our personal finance guides to enhance your understanding.

If that notion appeals to you, your initial reaction may be to send a check or make an online donation to your favorite nonprofit. While this is totally acceptable, you may be missing out on some tax benefits that come with alternate modes of contributing.

Here are some ideas for extending your giving while potentially saving money on taxes.

Profit from Qualified Charitable Contributions

You must make required minimum distributions (RMD) from your individual retirement accounts if you are 72 or older (IRAs). However, if your RMD is greater than what you need to meet your expenses, you may have a terrific opportunity to give to charity while managing your tax bill. Simply instruct your IRA provider to direct the RMD amount – or more – to the charity.

This is referred to as a “qualified charitable contribution” (QCD). The QCD fulfills your RMD responsibility, and the amount distributed to charity is tax-free as long as it is less than the annual exclusion limit of $100,000. If you file a joint return, your spouse can also claim a QCD of up to $100,000.

While the needed minimum distribution age has been raised to 72, the ability to use QCDs remains at 70.5. As a result, regardless of whether they itemize, tax filers in this age bracket can make a charitable gift to a qualifying charity directly from their IRA.

Use a Gift to Get a Tax Break

In some cases, you may want to gift directly to a person. If this is the case, you can benefit from the annual gift tax exemptions. The IRS permits anyone to give up to $15,000 (in 2021) to another person. The gift does not add to the recipient’s taxable income or count towards your estate and gift tax exclusion amounts. You and your spouse can each contribute $15,000 to the same person since each individual can make donations up to the annual gift tax exclusion threshold per recipient. This implies you and your spouse might contribute $30,000 to a friend experiencing financial trouble. Furthermore, a loved one who has suffered an unexpected loss can be compensated without incurring gift tax consequences.

Many people intend to leave an inheritance to family members, as we all know. However, in some situations, you may want to consider gifting those family members before your death. Therefore, you can witness how your presents are used and enjoyed by your loved ones. This concept of “giving while living” is another approach to taking advantage of the $15,000 yearly gift tax deduction.

Similarly, you can contribute to a 529 college savings plan to assist a child’s or grandchild’s education. However, keep in mind that the $15,000 gift tax exclusion per person applies. Although there is an accelerated five-year gifting rule that could apply, see your tax adviser.

Gift Your Winners to Save Money on Taxes

When people make a donation to their favorite charity, they normally use a checkbook or a credit card. However, given the markets’ record highs, there is another way to give to causes you care about. That may be highly beneficial this year: you can gift appreciated stock shares that you own. The organization can sell the shares at the current market price. Thus, you will not be taxed on the capital gains on the asset’s appreciation.

If you give away appreciated stock that you’ve owned for more than a year, you can normally claim a charitable tax deduction for the entire fair market value of the shares. This method avoids the capital gains tax that would be due if you sold the shares and donated the proceeds.

Consider employing one of these tax-advantaged techniques while you carry out your charitable intentions. They have the potential to make the holidays even more enjoyable for you and those you care about.