How Do You Maximize Charitable Contribution Deductions for Clients?

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    How Do You Maximize Charitable Contribution Deductions for Clients?

    When it comes to harmonizing altruistic endeavors with fiscal responsibility, financial planners are key in navigating the complexities. A Principal & Financial Planner begins by crafting a strategic approach to charitable giving, and alongside industry leaders, we also explore additional answers, including leveraging carryover deduction benefits. Here's a blend of expert advice and practical tips to help clients make the most of their charitable contributions without derailing their financial objectives.

    • Strategize Charitable Giving
    • Balance Philanthropy with Financial Health
    • Utilize Higher Cash Contribution Limits
    • Recommend Itemizing Deductions
    • Advise Bunching Charitable Gifts
    • Suggest Qualified Charitable Distributions
    • Leverage Carryover Deduction Benefits

    Strategize Charitable Giving

    Deciding how much to give is always the client's decision. However, I can help them make their gifts go even further than would be possible with the following strategies:

    First, we may try a donor-advised fund. We use these in line with a clumping-giving strategy or high-income year followed by low-income years, such as with the sale of a business.

    We also use clumping giving. This is when we give multiple years' worth in one year and typically lines up with a stock gift or giving some other appreciated asset. It is only beneficial for certain individuals whose itemized deductions are typically close to the standard deduction.

    Stock gifting is another strategy we use. This is when we give away a stock or multiple stocks directly to a 501(c)(3) non-profit to avoid capital gains taxes from the individual's side; the charity pays 0% in taxes, and everyone is better off.

    We also focus on maximizing emotional returns. Sometimes the best gift isn't deductible. It could be buying the single mom's groceries at the grocery store, paying for the new dad's car battery, or helping a friend in need. Often, the emotional benefit is much greater, although not tax efficient.

    Stephen Boatman
    Stephen BoatmanPrincipal & Financial Planner, Flat Fee Financial

    Balance Philanthropy with Financial Health

    Helping a client maximize their charitable contributions without messing up their financial goals is like balancing on a tightrope—thrilling, but you don't want to fall off. At Spectup, we start by getting a full picture of their finances. I remember this one client, a generous soul, who wanted to donate a hefty sum to charity. Their heart was in the right place, but they were worried about their savings looking like a dried-up well afterward.

    First, we took a deep dive into their financials. We explored donating appreciated assets, like stocks, instead of cash. Why pay capital gains taxes when you can donate those stocks and get a tax deduction for the full market value? It's like getting a tax break for being awesome.

    We also discussed donor-advised funds. Think of them as a charity savings account: you get the tax deduction now, and then decide later which charities get the money. This flexibility was a hit with our client, who liked having more control over where their money ended up.

    Timing can be everything. We looked at bunching donations into a single tax year to exceed the standard deduction. It's like hitting a home run with your tax return—more bang for your buck. And, of course, we made sure all these moves fit within their broader financial plans. No one wants to feel generous today and regret it tomorrow when their retirement fund looks a little too lean.

    At the end of the day, it's about making sure their philanthropy doesn't leave them eating instant noodles in retirement. We kept the strategy flexible and aligned with their passions, ensuring they could be generous without any financial heartburn. It's all about finding that sweet spot where generosity meets financial savvy.

    Niclas Schlopsna
    Niclas SchlopsnaManaging Consultant and CEO, spectup

    Utilize Higher Cash Contribution Limits

    Tax accountants often make use of the higher deduction limits for cash contributions set by tax laws, which can be up to 60% of the donor's adjusted gross income. This means more money given to charities can reduce taxable income significantly. To achieve this, they guide clients in making generous cash contributions to qualified nonprofits.

    These financial moves not only support good causes but also lower the client's taxable income considerably. It's a dual benefit that serves both philanthropic and financial planning goals. If you're considering a large monetary gift, consult a tax accountant to maximize your benefits.

    Recommend Itemizing Deductions

    Itemizing deductions is a strategy that tax accountants may recommend when a client's total deductions could exceed the standard deduction offered by the tax code. By carefully documenting and claiming all possible qualified expenses, including charitable gifts, a taxpayer's taxable income can be reduced. This method requires meticulous record-keeping and understanding the nuances of what can be legally deducted.

    The objective is to surpass the standard threshold, ensuring that every donation counts toward significant tax relief. To take full advantage of itemization, keep thorough records of your charitable giving and discuss the approach with a knowledgeable accountant.

    Advise Bunching Charitable Gifts

    Bunching is an approach where tax accountants advise clients to accumulate multiple years of charitable gifts into one tax year. This can amplify the tax deductions by surpassing the itemized deduction limits in a strategic year. Essentially, this technique allows taxpayers to time their donations to achieve the best tax benefit.

    It requires careful planning and timing, but the rewards can be substantial in terms of tax savings. Consider discussing the bunching strategy with a tax expert to determine if it can enhance your charitable giving and tax position.

    Suggest Qualified Charitable Distributions

    To reduce a client’s taxable income, tax accountants may suggest qualified charitable distributions (QCDs) from individual retirement accounts (IRAs) for individuals over 70.5 years of age. This method directs funds that would normally be taxed as a distribution to a charitable cause, satisfying required minimum distributions while not being included as taxable income. It's an elegant way to support charities and simultaneously manage tax burdens associated with retirement funds.

    By pursuing a QCD, retirees can see their philanthropic efforts go further. Speak with a financial advisor if you're interested in using your IRA in a tax-efficient charitable giving strategy.

    Leverage Carryover Deduction Benefits

    Maximizing the carryover of excess charitable contribution deductions is another tactic tax accountants might employ to enhance a client's tax savings over several years. When donations exceed deduction limits in a given year, the remaining amount can often be carried forward. This can lead to considerable tax advantages in subsequent years.

    This requires understanding the complex rules regarding the lifespan of the carryover. Taxpayers looking to make substantial contributions should get advice on how to leverage the carryover to balance their generosity and tax liabilities. Make an appointment with a tax professional to discuss how your charitable contributions can provide you with multi-year tax benefits.