In my experience as a financial advisor, doctors – most likely including you – give generously to charities. As long as you donate, why not take advantage of a tax benefit? It has become a little more complicated but it is certainly doable.
The increase in the standard deduction makes it more difficult
Let’s start with a little background. The Tax Cuts and Jobs Act 2017 (TCJA) nearly doubled the standard tax deduction. For 2021, it is $ 12,550 for singles and $ 25,100 for married couples. The resulting combination of the TCJA with the $ 10,000 limit on state and local tax deductibility results in only about 10% of Americans retailing rather than taking the standard deduction.
Why should you care? Because if your itemized deductions, including charitable donations, do not exceed $ 25,100, you will qualify for the standard deduction and not get much tax reduction on your charitable donations. If you are married and benefit from the standard deduction, you can only deduct up to $ 600 for charitable donations. Fortunately, you can expect a much larger tax deduction even under the new rules.
Let me tell you about four practical tax saving strategies for your charitable giving.
Strategy # 1: Donate valued assets
The first method is to avoid taxes on capital gains resulting from the sale of appreciated investments. For example, your place of worship is launching a fundraising campaign and has approached you for a donation of $ 50,000. If you dig deep, you can afford it. But instead of giving away money, let’s look at what a valued asset is and why it would be a better alternative.
Suppose you invested $ 10,000 in a stock 10 years ago. This credit is now worth $ 50,000. If you sell the stock and donate the proceeds, you’ll have to pay 15-20% federal capital gains tax (depending on your tax bracket). You will lose even more if your state, like my beloved Minnesota, has capital gains taxes.
Here is a solution. Donate the $ 50,000 in shares directly to the charity, which can turn over the next day and convert it to cash. You will avoid paying capital gains tax and the entire $ 50,000 will be taken into account for charitable donations. Sounds good, doesn’t it?
Strategy # 2: Lumping
Let’s look at another technique, called lumping, where you âbundleâ 2 years of charitable donations. This strategy makes sense if your other deductions cause you to exceed the standard deduction for the year.
For example, you can plan to donate $ 5,000 to a charity in 2021, and your other deductions are $ 20,000, for a total of $ 25,000 in deductions if you itemize. Rather than itemize, you would take the standard deduction of $ 25,100. Your total of $ 5,000 in charitable donations will only give you a tax benefit of $ 600.
This is where regrouping comes in. You can pool 2 years of $ 5,000 in charitable donations, thus contributing a total of $ 10,000 for that year and the following year. Your itemized deductions for 2021 are now $ 30,000. With this method, you get more tax benefits on your charitable contributions. If no other assumption changes, you will benefit from the standard deduction in 2022.
There are, however, a few pitfalls to regroup. First, it requires more planning. Second, it’s hard to explain to your favorite charities that you’re doubling your charitable donation this year, but skipping your donation altogether next year.
Strategy # 3: Donor Advised Fund (DAF)
A donor-advised fund is similar to the whole idea, but on a larger and more impactful scale.
Let’s say your annual deductions without charitable donations are $ 10,000 each year. In addition, you give $ 15,000 per year to a charity. In this scenario, you will opt for the standard deduction of $ 25,100 rather than the breakdown. And you will never receive more than the symbolic deduction of $ 600 from your charitable donations allowed when you use the standard deduction.
You can try this instead: open a DAF and deposit $ 45,000, assuming you want to donate $ 15,000 to one charity per year for each of the next 3 years.
During the next 3 years, you give your usual donations to your usual charities but the donations are made from the DAF. It’s a bit like a donation from a charitable bank account.
Now let’s see what the tax benefit of a $ 45,000 per year contribution looks like when you use a DAF. In the year you deposit the $ 45,000 in the DAF, you will itemize your deductions: $ 45,000 to a charity plus the usual $ 10,000 in other itemized deductions, for a total of $ 55,000 in deductions. detailed. That’s well above the standard deduction of $ 25,100. It works because your contribution to DAF is considered a full donation – and no longer your asset – when you put money or securities into the account. For the following 2 years, you benefit from the standard deduction. In year 4, you repeat the process paying $ 45,000 to the CFO and itemizing your taxes.
Good deal, right? Additionally, if you donate to the DAF with appreciated assets as described above, you will avoid capital gains.
Strategy # 4: Qualified Charitable Distribution (DCQ)
Are you over 70.5 years old? Then the Qualified Charitable Distribution (QCD) strategy is probably your best bet.
Once you reach the age of 70.5, you can get the biggest tax benefit with a QCD. It simply means donating directly from your IRA account, up to $ 100,000 per year. A withdrawal from your IRA will not be included in the calculation of Adjusted Gross Income (AGI), even if the money comes from a pre-tax account. Once you are 72 and need to start collecting the Minimum Required Distributions (RMD) from your pre-tax accounts, the QCD counts towards meeting your annual RMD. Customers who have donated from a donor advised fund clear and close that account when they reach 70.5 and fully switch to donating through the QCD method.
The Basics of Tax-Conscious Charitable Giving
New tax regulations make obtaining tax benefits for your charitable deductions more complicated than in the past. But you can see how the above strategies can allow you to give to your favorite organizations without the government eating away at it. With good planning, two big things happen: You can feel good about giving and potentially avoiding thousands of dollars in tax payments. Not a bad plan.
Disclaimer: We do not provide legal or tax advice. You should consult a legal or tax professional about your personal situation.
The above article is intended for informational purposes only. Please consult a legal or tax professional regarding your situation.
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About Dr Joel Greenwald
Joel S. Greenwald, MD, graduated from Albert Einstein College of Medicine in the Bronx, New York, Joel completed his residency in internal medicine at the University of Minnesota.
He practiced internal medicine in the Twin Cities for 11 years before making the transition to financial planning for physicians, starting in 1998.
Joel’s wife is a radiation oncologist, which makes him all too familiar with the stresses of medical practice.
Knowing first-hand the challenges of practicing medicine, Joel’s passion is to make the lives of physicians easier by helping them ease their financial worries.
Connect with him on LinkedIn or on his website.