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Ways to Maximize Your Giving Impact

The holidays are a time for giving. In addition to the warm fuzzy feeling we get from donating to our favorite charities this time of year, these last few weeks of December are our last chance to reduce what we’ll owe Uncle Sam come April.

Here are some strategies to maximize your giving power while potentially minimizing your tax liability.

Donate Appreciated Investments

With the S&P 500 roughly doubling between 2016 and 2021, many investors have appreciated non-cash assets — such as stocks, mutual funds, and real estate in their portfolios. Gifting these assets — if you’ve held them for more than one year — can provide an opportunity to leverage one’s charitable giving.

First, you can potentially eliminate the capital gains tax you would incur if you sold the assets yourself and donated the proceeds. Second, you may claim a fair market value charitable deduction for the tax year in which the gift is made. For example, you could by a pianting for $20,000, have it appraised in a few years for $75,000, then donate it to claim a $75,000 deduction.

Charitable Stacking

Many people who donate to charity take the standard deduction when filing their tax returns, because they do not have enough to itemize their deductions. This means they do not receive any tax savings for their charitable donations.

But you can benefit from consolidating two years’ worth of giving into one. 

For instance, let’s say you decide to stack, or combine, your 2021 and 2022 charitable contributions into one year (2021). You would then itemize deductions on your 2021 tax return and take the standard deduction in 2022.

A great way to increase your itemized deductions is to prepay contributions into a donor-advised fund (DAF) — an investment account administered by a qualified non-profit used solely for charitable giving.

Donors receive an immediate tax deduction for each year they contribute cash, appreciated assets, or investments to their DAF.

However, with Charitable Stacking, the special CARES Act deduction ($300 for single filers and $600 for married couples) for cash donations made to qualifying organizations in 2021 won’t apply.

Donating Retirement Assets

If you’re in or near retirement, you can also consider using Qualified Charitable Distributions (QCDs) to manage your required minimum distributions from an IRA.

QCDs allow individuals who are 70½ years old or older to donate up to $100,000 total to one or more charities directly from a taxable IRA — instead of taking their required minimum distributions.

Soon to be retirees can covert a retirement account to a Roth IRA and they’re quite popular. That’s because, unlike a traditional IRA, Roth IRAs have no required minimum distribution (RMD) rules and allow you to withdraw earnings tax-free in retirement.

But, converting a traditional to a Roth IRA is considered a taxable event — meaning you must pay taxes on the amount you’re transferring.

Fortunately, you can offset some of that taxable income while fulfilling your philanthropic goals.

If you’re planning to make donations in future years, consider condensing your contributions into a larger-than-usual gift the same year you complete your IRA conversion.

The greater the donation, the more you can itemize and deduct, giving you a substantial tax break when you need it most.

Even as the economy and people’s financial situations recover from the effects of the pandemic, the need for charitable giving will always remain.

Hilltop Wealth Advisors can help you determine the best strategies to amplify your generosity.

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The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice. Hilltop Wealth Solutions is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training. While efforts are made to ensure information contained herein is accurate, Hilltop Wealth Solutions cannot guarantee the accuracy of all such information presented.

© 2022 Hilltop Wealth and Tax Solutions

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