Dodging tax legally has always been a popular pastime for smart business owners. While there are many ways to do this, one that is often overlooked is making charitable donations.
Sure, philanthropists get the warm and fuzzies from helping those in need. But what most people don’t know is that charitable donations also provide tangible benefits for your financial and tax planning.
In this article, we will explore how donating to charity can benefit you financially. We’ll also take a look at three ways why charitable donations can save you money down the line.
Income Tax Deductions
One of the most obvious benefits of donating to charity is deducting the value of your donation on income taxes. The amount you can deduct depends on the type of property you donate and the organization you donate it to. Nevertheless, it can be a significant deduction.
Donating to public charities classified as 501(c)(3) organizations, for example, allows you to deduct the donation on your taxes as an itemized deduction. This can reduce your taxable income, and as a result, you will pay less tax on that income.
There are other ways to make the most of your donations. For example, you can bunch your deductions into a single year. This means that, in a high-income year, you donate more money to charity than you would in other years. You can then use a donor-advised fund to distribute those donations over time. This lets you take the deduction in the year when you have the greatest tax liability.
Donating to charity is a good way to reduce your taxes and support a good cause. By understanding the rules around deductions, you can make sure that you’re getting the most out of your donations.
Lower Capital Gains Taxes
If you have a long-term investment that has gone up in value, you may be subject to capital gains taxes when you sell it. But did you know that you can avoid some of those taxes by donating the asset to charity?
The benefits of donating long-term appreciated assets to charity are twofold: you can deduct the fair market value of the asset from your income taxes, and you can avoid capital gains taxes on the appreciation. This nets you up to 20% in capital gains tax savings—a crucial consideration when planning your financial future.
Remember the assets that fall under this category include both hard assets as well as mutual funds or stocks. Both public and non-publicly traded assets are subject to capital gains taxes.
For instance, if you own a business that you plan on selling soon, you could donate some shares to charity. This will help you avoid paying taxes on the appreciated value of those shares later on. Furthermore, it bumps up your deduction for the year.
Each year, you are allowed to donate an appreciated asset worth up to 30% of your adjusted gross income (AGI) and take the deduction in the year you donated it. If you donate more than that in a single year, you can carry the deduction over for the next five years.
Consult with your accountant or tax advisor to see if donating appreciated assets is the right choice for you.
Unlock Tax Benefits
There are several different types of tax-advantaged trusts that donors can use to give to charity. The two kinds to remember are a Charitable Remainder Trust or CRT, and a Charitable Lead Annuity Trust or CLAT.
The CRT is a popular choice for people who want to enjoy tax-deferred growth on their assets. The donor transfers assets into the CRT, and the trust pays out a fixed percentage of the trust’s value to charity each year. This payout can continue for a set number of years; the remainder of the trust assets is then distributed to the donor or their heirs at the end of the trust term.
The difference between CLAT and CRT comes down to those who have already realized their capital gains. The CLAT allows you to spread out their tax payments over several years. That can be a huge boon if they have a markedly high taxable income in a given year. Because CLATs are available even after you’ve sold your property, they’re an amazing choice for those who hit it big and want to ride the wave of their success.
Either way, these types of trusts offer a way to donate to charity and enjoy tax benefits yourself. Without proper financial planning, you could be missing out on opportunities to reduce your taxes and support the causes you care about.
Donating to charity is a win-win proposition. You get to help those in need and you can also lower your tax bill. By understanding the rules around deductions, you can make sure that you’re getting the most out of your donations while keeping your tax bill manageable.
Not only will you be able to take full advantage of the tax benefits of charitable giving, but you’ll also have peace of mind knowing that you’re doing your part to make the world a better place!
About The Author
Sophia Young recently quit a non-writing job to finally be able to tell stories and paint the world through her words. She loves talking about fashion and weddings and travel, but she can also easily kick ass with a thousand-word article about the latest marketing and business trends, finance-related topics, and can probably even whip up a nice heart-warming article about family life. She can totally go from fashion guru to your friendly neighborhood cat lady with mean budgeting skills and home tips real quick.