Some Tax Smart Ways To Contribute

Most everyone contributes to Second Chance Cocker Rescue to help the cockers-not for a tax benefit. For some contributors that itemize their deductions, there is an added tax benefit of being able to include their charitable contributions in their itemized deductions and get a tax benefit from the write-off.

There are some additional ways that some taxpayers may be able to reap tax benefits too. Two of the more popular ways to achieve these tax benefits are:

1. Donor Advised Funds. This is an increasingly popular way to donate to charity-they are easy & convenient to set up and use. Many of the major stock brokerage companies like Schwab Charitable,Fidelity Charitable and Vanguard Charitable have user friendly web based applications that make set-up, donating and granting to charities easy. And at a very low cost, with them handling all the record keeping. It allows you to set up your own family’s charitable fund with very low cost(some brokerages as low as  $100). So, here’s how it works & what the potential tax benefits are:

—you set up a donor advised fund at your favorite stock brokerage company(like Schwab,Fidelity or Vanguard), which is very easy to do on-line or over the phone. People typically pick their current stock brokerage company(but it pays to shop around on-line for fees , etc)

—You contribute either cash or assets like stock  you own to your Donor Advised Fund-if you have a brokerage account at the same company as your Donor Advised Fund, its as easy as a few clicks of the mouse or a quick phone call to make the donation. Note: if you donate stock, you avoid permanently all capital gains taxes on the stock that you’ve owned for a year or more —the tax savings here can be significant. For example, if you bought stock a long time ago for $1000 and its now worth $5000, when you donate this stock to your Donor Advised Fund, you avoid the $4000 capital gain permanently. Also you are entitled to a charitable deduction(if you itemize) on the full fair market value of the stock on the date of the donation-a $5,000 charitable deduction in the example given.

—you then decide what charities you want to have your Donor Advised Fund contribute to—you can pick as many as you would like. And there is no time limit as to when you make the donation. It doesn’t have to be the same year as your contribution. You can take as long as you want, so your donations from your fund can take place over several years. And you still are entitled to the charitable deduction the year you make your contribution.

—some taxpayers don’t itemize their deductions, but rather use the standard deduction(currently $12,200 for singles & $24,400 for married filing jointly). For these taxpayers, an  increasingly popular technique is to “bunch” their contributions into one year(do several years of planned giving & make them all in one year) so that the “bunched” contributions now make it worthwhile to itemize(since the bunched contributions push you over the standard deduction amounts) rather than use the standard deduction. Donor advised funds are an ideal way to “bunch” your contributions since you obtain the charitable deduction in the year contributed, but you can make the actual donations out of you Donor Advised Fund over the several years that you otherwise would be having the money go to the charities

2. Qualified Charitable Distributions. As everyone that is 70 1/2 years of age knows(72 years old starting in 2020), the rules are that you must take out a certain amount from your IRA every year(call a Required Mandatory Distribution-or RMD for short). If you don’t make your annual RMD, the penalties can be stiff-a 50% penalty on the RMD amount you failed to make. When you do make the RMD, you are taxed on the amount of each annual RMD as ordinary income-and taxed accordingly. For people that don’t itemized their deductions and use the standard deduction, they don’t get the tax benefit of their charitable contributions.But, there is a way to get the full 100% tax benefit of your charitable contributions. Its by making a Qualified Charitable Distribution(known as a QCD)-you have your IRA Custodian issue a check from your IRA payable directly to the charity. The amount of the QCD(up to $100,000 annually) counts towards your RMD, but isn’t included in your taxable income. So, this is a great way to satisfy your annual RMD and at the same time get the equivalent of a full 100% charitable deduction, even if you don’t itemize your deductions and use the standard Deduction. Commentators advise against using the technique on Roth IRA’s, but it works on traditional and other IRA’s.