If you’ve recently filed your 2023 tax returns and had to write a large check to Uncle Sam, you may be looking for ways to reduce your tax liabilities in 2024. The good news is you can use several tax planning strategies to reduce that financial burden.
If you are philanthropically inclined, making a charitable donation is one way to increase your impact on the causes you care about while improving your financial well-being. In this blog, we will explore four ways to give to help reduce your tax burden.
Our team of Austin investment advisors specializes in helping successful individuals like you develop and implement charitable giving strategies to lower your tax bill in 2024. Albert Einstein once famously said, “The hardest thing to understand is the income tax.” We’re here to help you sort through some of your options.
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1. Donating Appreciated Stock
One of the most impactful ways to reduce your tax burden is to donate appreciated stock to support your favorite charities. Donating appreciated stock can be a win-win: Your chosen nonprofit gets more financial support, and you enjoy a tax-efficient way to contribute, which reduces your tax liability and maximizes your charitable impact.
This approach benefits you because it allows you to bypass the capital gains tax you would have incurred if you had sold the stock yourself. The charity benefits by receiving the current market value of the stock, and you can claim a sizable deduction on your tax return.
This method is especially advantageous for larger donations of appreciated property and can be a significant part of your wealth management strategy. Before implementing this strategy, consider speaking with an Austin investment advisor who can help you analyze the solution that produces the best results.
- Select stocks that have increased in value since you bought them and that you’ve held for over a year.
- Make sure the charity you choose is set up to receive stock donations. Most established nonprofits can handle this.
- Contact your broker or financial advisor to transfer the shares directly to the charity’s brokerage account. The shares must be transferred directly to avoid capital gains taxes.
- The charity should provide you with a receipt that states the number of shares donated and their value on the date of transfer.
Here’s an example of how you benefit from the donation of appreciated stocks:
Let’s say you purchased stock for $50,000 that’s now worth $100,000. If you were to sell the stock yourself, you would typically pay capital gains tax on the $50,000 profit. However, donating the stock directly to a charity can avoid the capital gains tax. Plus, you can deduct the full $100,000 value of the donation on your tax return if you itemize deductions, subject to IRS limits.
This move reduces your taxable income and allows you to contribute more significantly to the charity than if you had sold the stock and donated the after-tax proceeds.
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2. Bunching Donations
If you are in a higher tax bracket, consider bunching donations. This tax planning strategy consolidates multiple charitable contributions into a single tax year. The idea is to exceed the standard deduction threshold, allowing you to itemize deductions and lower your taxable income more effectively than if you spread your donations out over several years.
Let’s say you typically donate $5,000 to charity each year. Under the standard deduction clause, these donations may not exceed the threshold you need to make itemizing worthwhile.
However, you could donate $15,000 every three years instead by bunching.
This larger amount could push you over the standard deduction limit, allowing you to itemize and potentially reduce your tax bill significantly.
For example, if you are in the 24% tax bracket, you could reduce your taxable income by an additional $10,000 over the standard deduction ($5,000) by bunching your donations. This could lead to tax savings of $2,400 (24% of $10,000) in the year of the bunched donations.
3. Utilizing Donor Advised Funds (DAFs)
Donor Advised Funds (DAFs) are another Austin tax planning strategy that offers a flexible way to support your favorite charities while enjoying immediate tax benefits.
When you contribute to a DAF, you can claim a tax deduction in the year you donate versus when the funds are distributed to charities. This feature is particularly beneficial if you have a year with unusually high income—from selling a business to receiving a large bonus—and you’re looking for ways to reduce your taxable income.
For example, let’s suppose you had a windfall year due to selling a part of your investment portfolio that experienced significant appreciation. Facing a substantial capital gains tax, you decide to contribute a portion of your proceeds to a DAF.
By doing so, you can deduct the fair market value of the contributed assets from your taxable income, lowering your tax bill for that year. Later, at your discretion, you advise the fund to distribute amounts to various charities you support over time without any additional tax consequences.
This allows you to reduce your immediate tax burden and gives you the flexibility to thoughtfully distribute the funds to causes you care about without rushing to make those decisions within a tax deadline.
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4. Charitable Remainder Trusts
Charitable Remainder Trusts (CRTs) can help you support important causes while managing your tax liabilities more efficiently.
You transfer different types of assets into the trust, which then pays you (or another designated beneficiary) a stream of income for a set number of years or two lifetimes (you and a spouse). After a set period or the demise of both spouses, whatever’s left in the trust goes to your charitable beneficiary.
When you transfer assets into a CRT, you get an immediate tax deduction based on the value of your gift to charity minus what you expect to get back in income. This can be a significant deduction, lowering your current taxable income.
Say you’ve got a stock portfolio that’s ballooned in value. Selling it outright would mean a hefty capital gains tax. But by placing it in a CRT, you sidestep this.
This can mean less taxes and more income over time, plus a generous donation to your favorite charity, all while reducing your current tax liabilities. It’s a win-win-win situation!
At Beck Capital Management, our Austin-based wealth management and estate planning professionals can help you develop a charitable giving strategy that pursues your goals and benefits the organizations you care about at the same time. Interested in learning more?
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