It’s that time of year. Neighborhoods are twinkling with decorative lights, shoppers are filling stores in search of must-have gifts – and financial advisers are busy helping clients finalize their last-minute tax planning for 2021.
It’s also the season when many charities receive the bulk of their annual donations, as the holiday spirit inspires people to give a little more. As we near the end of 2021, investors who’ve seen their portfolios grow significantly due to gains in the stock market may be feeling particularly generous, especially if the painful challenges of the pandemic have opened their hearts to giving more freely.
If that idea resonates with you, your first instinct might be to mail a check or pledge a donation online to your favorite nonprofit. While doing so may be perfectly fine, you may be missing out on certain tax advantages that come with alternative ways of giving.
Here are some ways to extend your generosity, and at the same time potentially reap tax savings.
Gain by Giving Through Qualified Charitable Contributions
If you’re age 72 or older, you need to make required minimum distributions (RMD) from your individual retirement accounts (IRAs). But if your RMD amount is more than you need to cover your expenses, you may have a great opportunity to give to charity while managing your tax bill. Simply have your IRA provider send the RMD amount – or more – directly to the charity.
This strategy is known as a qualified charitable contribution (QCD). The QCD fulfills your RMD obligation, and the amount distributed to the charity does not count toward your income taxes, as long as it’s less than the annual exclusion limit of $100,000. And if you file a joint return, your spouse can claim a QCD for up to $100,000 as well.
While the age for required minimum distributions has been moved to age 72, the ability to use QCDs is still age 70.5. So, tax filers within this age group, regardless of whether they itemize, can make a charitable contribution under the exclusion limit directly from their IRA to a qualifying charity.
Utilize Gift Tax Exclusions
In some situations, you may want to give directly to a person. If this is the case, you can take advantage of the annual gift tax exclusions.
The IRS allows anyone to give up to $15,000 (in 2021) to another person, and the gift transfers without adding to the taxable income of the recipient or counting against your estate and gift tax exclusion amount. Since each individual may make gifts up to the annual gift tax exclusion amount per recipient, you and your spouse can each give $15,000 to the same person. This …….