Give More, Pay Less in Taxes

Give More, Pay Less in Taxes

March 07, 2024

Tax Season is in full swing here at Strojny Financial Services, and we’re doing our best to help our clients make tax-smart investment decisions based on their individual goals and risk profile. As we prepare tax returns this year, we’ve been discussing SECURE Act 2.0 provisions with small business owners. This may be a year you want to make a post-end-of-year contribution to a Solo 401(k) or change your plan type to a 401(k) for higher deferral options. The flexibility with the new law is helpful. Plus, you may be eligible for credits if you enroll in a new 401(k) plan to help offset setup and administration costs. Anytime we can marry a tax and investment benefit, it is a focus.

Similarly, we have lots of questions coming in about the Beneficial Ownership Information (BOI) reporting and attached penalties. We decided intentionally, as a firm, to file these reports for our clients upon request only for a fee of $100. We will not file these firms automatically on behalf of any client, so please contact us if you are interested in having your paperwork completed for you.

We have many clients who are very generous to their church or favorite charity but can’t itemize deductions. Keeping the income off the tax return and helping potentially reduce taxable Social Security is a double win. Our favorite tax tip this time of year involves five powerful strategies for charitable giving that can benefit you and the organizations you support. Working with Strojny Financial Services can help you maximize your charitable impact while optimizing your tax situation.

Gifting Appreciated Securities. If you own stocks, mutual funds or anything that has appreciated and has untaxed gains in your investment accounts, you can gift that stock directly to a charity or certain charitable investment funds without having to pay capital gains tax on the investment’s growth. You are still giving the full amount to causes you care about, while getting a tax deduction from your gift and reducing the taxes you’ll pay in your investment account over time.

Donor Advised Funds. Similar to how you can gift appreciated securities to a charity directly, you can gift appreciated securities to a Donor Advised Fund. A Donor Advised Fund is a type of investment account where you can house and grow assets that you’d like to gift to charity over time and you can make contributions directly from that account. By taking stocks in your portfolio that have increased in value the most and donating them into a Donor Advised Fund, you can gain a tax deduction for the donation and forego the capital gains tax you would have paid on those stocks’ appreciation. The assets in your Donor Advised Fund are invested so they continue to grow, and you have complete control of how and when the funds are doled out to charities. You’re also able to replenish the funds in your investment account with fresh cash that doesn’t have capital gains.

Charitable Remainder Trusts. You can also gift appreciated securities to a Charitable Remainder Trust (CRT). A CRT is an irrevocable trust designed to provide you with an income stream and tax deduction on assets that will eventually be donated to the charity of your choice. A CRT is established by creating a trust, transferring property (typically highly appreciated assets) into it and choosing which charity will ultimately benefit. When the trust is established, you can decide how long you want to generate income before donating the remaining assets to a charity and whether you want to be the recipient of the income or choose someone else to benefit.

The chosen charity will serve as the trustee, including managing the assets, which takes the decision-making process out of your hands. As part of the setup, you’ll also choose whether income will be received as a fixed amount or a percentage of the value of the trust. Beneficiaries are required to receive between 5% and 50% of the income annually and you also need to decide how many years to receive income (not to exceed 20) before donating the rest.

Qualified Charitable Distributions. If you are 70 ½ or older, you can support your favorite charitable causes with Qualified Charitable Distributions (QCDs). With a QCD, you can directly transfer up to $100,000 in tax-deferred retirement savings to a qualified charity without incurring taxable income on the distribution, reducing your overall tax liability. This can be especially beneficial for retirees who are required to take minimum distributions from their traditional IRAs, as it reduces their taxable income, potentially lowering their overall tax liability. Unlike regular charitable deductions, which may have limitations based on your adjusted gross income (AGI), QCDs don’t have AGI limitations. This means you can make substantial charitable contributions through QCDs without worrying about income-based restrictions.

Bunching. If you plan to make charitable contributions on a regular basis, you can bunch gifts into a larger lump sum once every couple of years to exceed the standard deduction amount. That will allow you to itemize deductions again and receive an incremental tax benefit. You can also use bunching strategies in conjunction with any of the above strategies such as five years or gifting to a charity, Donor Advised Fund or Charitable Remainder Trust.

Contact us at Strojny Financial Services to explore the different types of charitable giving and maximize your tax benefits by aligning your gifting goals with your plan.

Retirement plan withdrawals may be subject to taxation and penalties when withdrawn early. Investments are subject to market risks including the potential loss of principal invested. Past performance is not a guarantee of future results.