Supercharge your charitable giving: Are you getting the most out of your taxes this holiday season?
The last float in Macy's Thanksgivingparade is everyone's favorite holiday figure: Saint Nicholas.
The Santa float is a sign that theholidays are finally here and the gift-giving season is in full swing. Macy’send goal is for shoppers to get excited for the holidays and begin shopping forgifts at their store. Macy's doesn't have the monopoly on gift givingthough.
Now is the time to check yourcharitable list for possible turbo charging opportunities. Check to see if youhave any securities in a gain position that you can use for charitable giftstoday.
Charities like hospitals,universities, and the Jimmy Fund will accept stocks, bonds and other assets asgifts. For those looking to give back more, this presents a wider opportunityto donate to your charity of choice. It also presents a few financial benefitsfor you as well.
In giving these as gifts you will geta tax deduction for the value of the security and avoid capital gains on theposition transferred. You can then repurchase the securities with the cash youwere going to use for the gift. Everyone wins, with the added benefit ofpreserving your wealth to address your financial goals. Long term appreciatedassets like securities are capped at 30% of your AGI.
For individuals 70 ½ and older, youcan make annual donations of $100,000 from your IRA tax-free. Normally youwould be penalized for taking money out of your account. For this to work,funds must be directly transferred from the IRA to the charity.
Although they come with some costs,the Golden years have some amazing benefits when it comes to preserving yourfamily's wealth. Let's look deeper into the types of contributions you can makearound the holidays that can benefit you come tax season.
Donor Advised Fund
A Donor Advised Fund (DAF) allowsdonors to make charitable contributions, receive tax deductions, and recommendgrant distributions.
The first step is to give a personal offeringof stocks, cash, real estate, and other assets to the fund. After, you receivean immediate max tax deduction from the IRS. As the value of the assets in thefund grow, you can gift the capital gains to charities like The Salvation Army.This is a great option for donors who are uncertain on how they would liketheir funds to be distributed. Deductions occur in the year of the originallump sum donation. Investors place money into the fund during high-income yearsfor greater tax deductions. In addition to the income tax deduction youreceive, capital gains tax will also be avoided. Accountants consider this adouble whammy.
All cash donations must be supportedby bank records and are capped at 60% of your AGI. To be eligible for taxdeductions, all contributions must be made by December 31st. If you were tomail out a check on the 31st, it would still be written off for the samecalendar year.
Thestock market has had a nice run this year, the Dow Jones has grown 18.7% as of November 2019. Leveraging charitablepledges grants wealth holders with an opportunity to potentially avoid taxpenalties. Do not allow your capital gains to squander, allot them to a causethat you are passionate about today.
Tangible Assets
Aside from securities, you can donatetangible assets to charitable organizations.
Tangible assets being any physicalobject that you wish to gift to an organization. To do this, the IRS needs you to find thefair market value of the product for tax purposes. The fair market valueincludes the condition of each asset and the cost to replace them.
If you donated a car that costs$4,000 and it depreciated by $3,000, you are still entitled to a $1,000deduction. This option is more logical than letting unused assets continue todepreciate. Holding depreciating assets is no different than leaving milk onthe countertop. Here are a few popular alternatives to consider: artwork, clothing,jewelry, and gems. Make sure to receivea written acknowledgement for your contribution for tax purposes.
Best of all, you can write off yourkids old toys! Take a tour through your children’s old toys and video games,they may save you some money on your taxes. Like all other assets, to writethem off, you must be able to present a strong case for their fair marketvalue. This can be done by searching websites like eBay for the productscurrent selling price. After, find the cost of replacing the items anddetermine the amount that can be deducted.
This strategy is great for getting rid of usedtoys, saving money, and giving them to a great cause! Gifting securities ortangible assets this time of year can provide immense benefits, not just interms of giving back to your community but also when it comes to tax season aswell. While giving is worthwhile in and of itself, you're leaving money on thetable by ignoring these benefits allowed by the IRS.
Some cons to be aware of
While there are numerous benefits toDonor Advised Funds, there are a few things to bear in mind.
There can be a gap between when anasset is gifted and when a charity actually receives the money (it can bemonths, but sometimes years) and as a result DAFs have been accused of slowingdown the flow of money to charities. DAFs have been criticised as a ‘bad dealfor charities’ most notably by New York philanthropistLewis Cullman. That said, the ability to hold the asset longer does have apotential upside in that it can increase in value.
Another potential downside is thefact that after the asset is gifted, the donor cedes all control to the sponsorof the DAF. Granted, most act accordingly and gif the asset properly but therehave been cases where this did not happen as described by this Investopediaarticle on a fund that wentbankrupt.
There are always going to be riskswhen it comes to financial management so it is important to understand the consin addition to the pros. At M3 Wealth Advisors we are here to guide you throughthe process and answer any questions that come up.
AtM3 we're here for you
Here at M3 Wealth, we have experienceleveraging tax-efficient investment strategies to help mitigate your tax burden.Don't allow your finances to drain by not utilizing tax deduction strategies.
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M3 Wealth Advisors andIntegrated Financial Partners do not provide tax or legal advice.