Tips For Tax Efficient Giving
Most of us are eager to claim as many tax deductions as possible. Unfortunately for many, the newly expanded standard deduction will preclude many of us from itemizing moving forward. If you are in a situation where you are close to itemizing based on mortgage interest, taxes, and specifically charitable giving, I would like to introduce the “Charitable Clumping” strategy. Effectively what you are doing is accelerating next year’s gifting into the current tax year. Below is an example. Steve and Lauren gift $10k per year to a local charity. Their mortgage interest and taxes amount to an additional $10k per year. The expanded standard deduction of $24,400 for 2019 is greater than their $20k itemized deduction so they would elect the standard deduction on their tax return. If Steve and Lauren were to decide to give 2020’s $10k donation to the charity prior to 2019 year-end, they would boost their 2019 itemized deductions to $30K and be able to reduce their taxable income by and additional $5,600 above the standard deduction. In 2020, they would not gift to the charity and claim the standard deduction on their taxes.
Additionally, Steve and Lauren could decide to gift appreciated shares directly to the charity. For instance, let’s assume Lauren worked for a public company and acquired 1,000 shares over time. She bought the shares for $1,000 and they are now worth $10,000. If she were to sell the shares in order to give to the charity, she would be subject to capital gains tax on $9,000 (proceeds – basis). Alternatively, she could gift the shares directly to the charity and would avoid this capital gain. Let’s look at once last scenario. Let’s say that Steve is 70 ½ years old and his 2019 Required Minimum Distribution is $10k. Steve could decide to gift that RMD directly to the charity and would not have to recognize the income. Additionally Steve and Lauren would still be able to elect the standard deduction of $24,400 on their tax return. Assuming Steve is in the 22% federal tax bracket, this would save him $2,200 on his federal tax bill.
There are many ways to implement the above strategies and we would be happy to discuss the details if you feel they might apply to you!