November 23, 2016
Thanksgiving is just around the corner with Christmas rapidly approaching. It has become the season of giving which can also translate into the season of tax planning. As your heart gets into the giving spirit, your tax return is ready to give back as well in the form of tax deductions and savings. There are a few strategies to help increase deductions or lower taxable income just by giving.
Qualified Charitable Distributions
A Required Minimum Distribution (RMD) must be taken from an IRA by April 1st of the year following the year in which you turn 70 ½ and every year thereafter. What happens if you are already in a high tax bracket and would rather not take the income hit from a RMD? Since the RMD is required, you are forced to take it or a penalty will be assessed. There are tax planning ideas to mitigate the income though. You can make a Qualified Charitable Distribution (QCD). A QCD donates your RMD to a qualified charity of your choice. If a QCD is used, none of the RMD is considered taxable (up to $100,000 of RMD). The deduction is a direct offset to what would have been taxable income, but this strategy can be useful in limiting the phaseout of itemized deductions and other calculations that are based on your Adjusted Gross Income. Certain charities do not qualify for QCDs, such as donor-advised funds, IRC section 509(a)(3) organizations, or private grant-making foundations. It is best to consult with your CPA before putting this strategy into practice.
Long Term Appreciated Stock
Stocks held for over one year are considered to be long term in the IRS’ eyes. When sold at a gain, those stocks can be taxed anywhere from 0% to 23.8% on the gain depending on your adjusted gross income. In order to avoid the gain and receive a deduction, those stocks can be donated to a qualified charitable organization. If the stock is considered held for long term, the fair market value of the donated stock can be treated as a charitable contribution limited to 30% of adjusted gross income and can be carried forward for five years. Instead of realizing a gain when selling the stock, donating the stock flips it and creates a deduction without having to pay tax on the gain first.
Are you not required to do an RMD for 2016? Do not have appreciated stocks held for long term in for portfolio? Are you still in the giving mood? There are always outright cash donations you can make to qualified charitable organizations. Cash donations are treated as an itemized tax deduction on your tax return, limited to 50% of your adjusted gross income. It is also imperative to receive a receipt, letter, or statement from the charity to substantiate the contribution.
As with any tax planning strategy, it is highly recommended that you meet with your CPA at SGA CPAs and Consultants to discuss them in further detail before acting to see if they are a fit for you.
SGA CPAs and Consultants is one of Central Oregon’s largest local tax, audit, and consulting accounting firms, located in Bend, Oregon.
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Period of Limitations: