I’m a Financial Advisor — Here Are 6 Tips To Reduce Taxes Through Charitable Donations This Holiday Season


courtneyk / Getty Images

courtneyk / Getty Images

If you fear a large tax bill in April, you might be wondering how you can reduce your tax liability with just two weeks left in the year.

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Julie Virta, CFP, senior wealth advisor and Vanguard personal advisor, recommended charitable giving as one way to reduce taxes if you itemize your deductions. However, she said she often sees novice donors make mistakes when it comes to charitable giving. These can be costly errors as they can minimize your potential tax deduction.

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As a financial advisor, Virta offered these tips to ensure your donation benefits the charity as much as possible while simultaneously helping to reduce your tax bill.

Donate Appreciated Securities Instead of Cash or Goods

If you’ve recently come into money, you might be tempted to make a generous cash donation to your favorite charity or donate items the organization needs or can resell.

But your money will go further if you donate appreciated assets such as stocks, exchange-traded funds or other securities, Virta suggested. “By gifting appreciated securities, you can give more money to your charity of choice and less to taxes,” she said.

“For example, if you wanted to give $10,000, you could do so as a cash gift,” she explained. “But if you have a stock worth the same, and whose value has increased significantly, you can gift it in kind to a qualifying organization, avoid capital gains tax on the sale of the asset, receive a charitable deduction and meet your giving goal all while possibly paying less out of pocket.”

You can also use this tactic to rebalance your portfolio in a rising equity market.

There’s an added benefit for the charity, too. “The organization won’t have to pay taxes if they decide to sell the donated investment,” Virta said.

Bunch Donations to Reduce Your Tax Liability This Year

If you have a favorite organization that looks forward to an annual gift, you may want to “bunch” the donations for a few years into a single year, especially if you have fewer deductions otherwise or have a higher income this year.

“By ‘bunching’ your charitable contributions in one year versus spreading [them] out over two or three years, you can increase your itemized deductions and lower your taxable income,” Virta said.

The next year you might not make a contribution unless your financial situation changes and you want to increase your giving.

Using this tactic “could potentially save you hundreds (or even thousands) of dollars in taxes, depending on the amount of your donation,” Virta pointed out. “Just make sure you have enough to make a large donation.”

Donate Throughout the Year

Rather than bunch two or three years’ donations, you might want to space out your charitable contributions throughout the year, which may open opportunities to give more.

“Year-end and the holidays are often considered seasons of gifting, so it’s not surprising that many people turn to charitable giving during this time,” Virta said. “While most charities receive the bulk of their donations late in the year, many organizations need funds year-round. Giving consistently throughout the year — rather than giving in bulk — can help charitable organizations’ financial planning, and it may also help you budget for a bigger gift overall.”

Take Advantage of Qualified Charitable Distributions From Your IRA

If you have an individual retirement account and are age 70.5 or older, you can donate funds of up to $100,000 annually from your account.

“These charitable distributions from your IRA can count toward your required minimum distribution that year; for those in a higher tax bracket, this can help spend down an IRA while also avoiding ordinary income taxes that would otherwise be due on these charitable distributions,” Virta explained.

Ensure Your Donations Go to a Qualified Organization

If you want to start doing more in the way of charitable contributions, you’ll want to make sure the organizations you choose are reputable and are qualified 501(c)3 nonprofits.

You can find qualified U.S.-based charities using a lookup tool such as the one provided by America’s Charities, located here, or the BBB Wise Giving Alliance, located here.

If you have an organization that you like and aren’t sure if they are a qualified charity, you can ask. They should be able to provide a letter showing their status as a qualified 501(c)3.

Virta reminded donors to make sure you get a written acknowledgement from the organization for each donation.

Consult With a Financial Advisor

Virta also recommended meeting with a financial advisor if you have recently come into wealth and want to make charitable giving part of your tax strategy.

“Just like saving for any long-term goal, charitable donations need a well-planned strategy to make the most impact,” she said. “A financial advisor can help you build a formal plan and update it each year to ensure you’re on track to meet your goals, while also maximizing available tax savings and being strategic about which assets to utilize.”

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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor — Here Are 6 Tips To Reduce Taxes Through Charitable Donations This Holiday Season


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