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Tips for Year-End Sharing Giving

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Tips for Year-End Sharing Giving

Give Back. Give Wisely.

If you are fortunate enough to be able to give back, ‘tis the season for planning your charitable donations. In addition to expressing your gratitude and contributing to the betterment of your community, charitable giving can also result in tax benefits and should be considered part of your year-end tax planning. Here are some considerations for your charitable contribution plan.

Tax deduction for charitable gifts

If you itemize deductions on your federal income tax return, you can generally deduct your gifts to qualified charities. This may also help potentially increase your gift. For instance, assume you want to make a charitable gift of $1,000. One way to potentially enhance the gift is to increase it by the amount of any income taxes you save with the charitable deduction for the gift. At an effective 24% tax rate, you might be able to give $1,316 to charity and save around $316 in taxes. On the other hand, at a 32% tax rate, you might be able to give $1,471 to charity and realize a $471 tax savings.

However, keep in mind that the amount of your deduction may be limited to certain percentages of your adjusted gross income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 60% of your AGI for the year, and other charity gifts are typically limited to 30% or 20% of your AGI. Charitable deductions that exceed the AGI limits may generally be carried over and deducted throughout the next five years, subject to the income percentage limits in those years.

For 2021 charitable gifts, the normal rules have been enhanced: The limit is increased to 100% of AGI for direct cash gifts to public charities. And even if you do not itemize deductions, you can receive a $300 charitable deduction ($600 for joint returns) for direct cash gifts to public charities (in addition to the standard deduction). Make sure to retain proper substantiation of your charitable contribution.

In order to claim a charitable deduction for any contribution of cash, a check or other monetary gifts, you must maintain a record of such contributions through a bank record (such as a cancelled check, a bank or credit union statement or a credit card statement) or written communication (such as a receipt or letter) from the charity showing the name of the charity, the date of the contribution, and the amount of the contribution. If you claim a charitable deduction for any contribution of $250 or more, you must substantiate the contribution with a contemporaneous written acknowledgment of the contribution from the charity. If you make any noncash contributions, there are additional requirements.

Year-end tax planning

When making charitable gifts at the end of a year, you should consider them as part of your year-end tax planning. Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at the lowest rate possible, and time your deductible expenses so they can be claimed in years when you are in a higher tax bracket. If you expect to be in a higher tax bracket next year, it may make sense to wait and make the charitable contribution in January so that you can take the deduction next year when the deduction results in a greater tax benefit. Or you might shift the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction amount. A tax professional can help you evaluate your individual tax situation.

Give Smartly

Ensure your generosity is shared with legitimate charities. It is common for scam artists to impersonate charities using bogus websites, email, phone calls, social media and in-person solicitations. Don’t send cash. Make your contribution via check or credit card.

Donor Advised Funds

Another consideration for your sharing strategy is a donor advised fund (DAF). With a DAF, you establish a giving account at a foundation. . When you make a donation, you receive a tax deduction and gain a convenient and secure instrument to grow the investment over time – especially when it makes sense for your tax strategy.

Often, people believe that donor advised funds (DAFs) are exclusive to the high-net-worth individual or an individual that has recently experienced a large liquidity event. But the account minimums and associated fees for a DAF are very approachable for any investors that are looking at long-term financial planning opportunities and current tax deductions.

DHG Wealth Advisors (DHGWA) has several options to use as third-party administrators for our DAFs. The funds are still held at TD Ameritrade and DHGWA manages those just like we do our other client accounts. Based on the client’s risk tolerance, the portfolios can be structured as conservative or aggressive.

The donor can structure the DAF in multiple ways. They are able to put specific rules in the agreement that only selected charities can receive grants or keep that option open for future grants. They can also pass along the designation authority to the next generation or other individuals on the donor’s passing. Or they can just terminate the fund at a selected date or event and have the fund proceeds be distributed to selected organizations.

DHGWA is available to answer your questions and help you design your charitable giving strategy, so let us know how we can best help you.

The information in this article should not be considered investment advice to you, nor an offer to buy or sell any securities or financial instruments. The services, or investment strategies mentioned above may not be available to, or suitable, for you. Consult a financial advisor or tax professional before implementing any investment, tax or other strategy mentioned herein. The information herein is believed accurate as of the time it is presented, and it may become inaccurate or outdated with the passage of time. Past performance does not guarantee future performance. All investments may lose money.