Charitable Tax Planning for Houston Businesses
Charitable giving is a social good, and with the right tax planning strategies, it can be positive for your tax situation as well. Donations are tax-deductible to an extent, but how and when you donate can optimize your tax benefits and ensure your philanthropy has maximum impact.
Tax planning services can identify the most effective charitable giving tax strategies for your situation. A trusted financial advisor is recommended, as this part of the IRS code is complex.
How Charitable Donations Factor into Tax Deductions
One of the major decisions taxpayers must make every year is whether to itemize their deductions or take the standard deduction. For many taxpayers, the standard deduction makes sense from a time-saving standpoint. For individuals or married couples who make frequent charitable donations, itemizing those gift deductions may provide tax benefits beyond what the standard deduction provides.
First, taxpayers will optimize their deduction by donating to a 501(c)(3) organization. These include:
- Churches, synagogues, temples, mosques and other religious institutions
- Nonprofit schools, universities, museums, hospitals, and medical research organizations
- War veterans’ groups
- Fraternal orders (if the donation is used for charitable reasons)
- Various national and international charities, such as The Boys and Girls Scouts of America, The Red Cross, The Salvation Army, The United Way, Goodwill, CARE and others
Organizations that do not qualify are noncharitable country clubs, sports clubs, civic leagues, labor unions, political organizations, homeowner’s associations and foreign organizations (with some exceptions).
Qualified charitable donations may be deducted from a taxpayer’s adjusted gross income (AGI) at varying rates, depending on the nature of the donation. Cash donations are deductible up to 60 percent of the taxpayer’s AGI, for example, if they are made to a qualifying organization. Charitable giving to a nonpublic organization and non-cash property donations are deductible at lower rates. Optimizing your giving to maximize deductions is a fundamental tax planning strategy.
Five More Tax Planning Strategies for Your Charitable Giving
For Houston individuals and couples who prioritize philanthropy, the following tax planning strategies can reduce the total tax bill:
- Timing charitable donations for deduction purposes – If you give regularly, consider whether bunching your donations together would make sense. In this strategy, charitable donations are grouped together during a single tax year in order to exceed the standard deductions and reduce taxes. If you make annual charitable donations, you may save money by donating more in one year, then reducing the amount the following year to take the standard deduction instead. The total value of contributions is the same, only divided and spaced out for tax benefits.
- Donate non-cash assets that have appreciated in value – If you own assets that have gained in value, you can donate that instead of liquidating it and donating the cash. The reason is capital gains taxes. Qualifying charitable organizations do not pay capital gains taxes when selling appreciated assets, but taxpayers do. Instead of selling off those assets and paying the capital gains taxes, donate the appreciated asset directly to the organization.
- Offset capital gains by harvesting losses and donating them – In a process termed loss harvesting, taxpayers can sell off securities that have declined below their cash value and use the loss to offset taxable capital gains, or up to $3,000 in standard income. Any remaining capital losses can also be carried over to future tax years for a lasting tax benefit.
If those capital losses are then used for charitable giving, they can be used to reduce taxes further.
- Offset the tax impact of a Roth IRA conversion – For some taxpayers, it makes sense to fund retirement accounts with after-tax dollars. Roth IRAs provide this benefit to taxpayers, which is ideal for people who expect their tax bracket to be higher in retirement.
To fund a Roth IRA, taxpayers may move funds from another retirement account to do so. This can provide long-range tax benefits to future retirees, but it has an immediate tax impact as well.
Charitable donations can be used to offset this additional tax burden and make the conversion process easier to manage.
- Create a charitable trust – Charitable remainder trusts (CRTs) are a popular tax planning tool for people who want to provide for beneficiaries in the present while ensuring the rest goes to charity. CRTs are funded with cash or non-cash assets, including property. They provide payments to named beneficiaries, such as family members, for a set number of years or until all beneficiaries have passed away. The remainder in the trust is then given to the named charitable organization.
Trusts provide protection from gift and estate taxes, so this is a generous way to remove property from an estate and reduce the impact of probate or estate taxes.
Charitable Giving is a Philanthropic Approach to Tax Planning
If you give regularly to charitable organizations, tax planning services will maximize your giving potential while reducing your tax burden. If implementing tax-saving strategies makes sense in light of your charitable giving, schedule a consultation with a trusted financial and tax advisor.
A reputable tax advisor can identify the right tax planning services for your particular tax situation and ensure your giving goals continue to fit into your financial future.
