Financial Planning
Filing Income Tax Return Jointly to Minimize Taxation of Your Social Security Benefits
Filing Income Tax Return Jointly to Minimize Taxation of Your Social Security Benefits
As an Fortune 500 employee, you might be interested in learning more about this tax strategy. You may donate to charitable organizations throughout the year solely out of a desire to support causes you care about. Nonetheless, if philanthropy is important to you, bear in mind that the associated tax deductions may increase your ability to donate. You may wish to take a more strategic approach to your charitable contributions, perhaps as part of your year-end tax planning.
Only if you itemize deductions on your federal income tax return can you generally deduct charitable contributions, which reduces your taxable income. Currently, the deduction is limited to 60% of your adjusted gross income (AGI) for charitable cash contributions. Aside from that, limits of 50%, 30%, or 20% of AGI may apply, depending on the type of property you donate and the type of organization you support. (Exceeding quantities may be carried forward for a maximum of five years.)
If Fortune 500 employees wish to claim a charitable deduction for a contribution of cash, a check, or another monetary gift, they must keep a record, such as a cancelled check, a bank statement, or a receipt or letter from the charity indicating the name of the charity, the date of the contribution, and the amount of the contribution. Donations of $250 or more require a contemporaneous letter of acknowledgment from the recipient organization. Non-cash contributions are subject to extra requirements.
Here are some strategies Fortune 500 employees can employ to increase their charitable impact and tax savings.
Bunch of time gifts and deductions
The Tax Cuts and Jobs Act roughly doubled the standard deduction beginning in 2018 and indexing it to inflation through 2025 ($12,950 for single taxpayers in 2022 and $25,900 for joint filers). The result was a dramatic decline in the proportion of taxpayers who itemize, which is now approximately one in ten.
If the total of your itemized deductions for the year will be slightly less than the standard deduction, it may be advantageous to combine charitable contributions from this year and the following year into one year, itemize on your tax return, and claim the standard deduction the following year.
Another option is to increase your charitable contributions in years in which you anticipate a higher income. For instance, charitable deductions could help mitigate the tax liability resulting from the sale of a business, capital gains, stock options, or conversion of a traditional IRA to a Roth IRA.
Utilize a donor-advised fund
Opening a donor-advised fund (DAF) is a second method for Fortune 500 employees to generate a large charitable deduction for the current year — perhaps before deciding where the money will go. Donors who itemize deductions on their federal income tax returns may deduct contributions to a DAF in the year they are made and then distribute the funds to the charities of their choice. Contributions to a DAF are irrevocable, which means the donor transfers legal control to the sponsor while retaining advisory rights regarding the distribution of funds and the investment of assets.
Donate from an IRA
If you are 7012 or older and own an IRA, you can make charitable contributions without itemizing and still receive a tax deduction through a qualified charitable distribution (QCD). A QCD must be an otherwise taxable distribution from an IRA (distributions from traditional IRAs are generally taxable). QCDs are excluded from income and will have no effect on your tax liability. Furthermore, once you reach the age of 72, a QCD can satisfy all or a portion of your minimum distribution requirement. To make a QCD, you would instruct the trustee of your IRA to write a check payable to a qualified public charity. You may contribute up to $100,000 to your IRA, and your spouse may contribute up to $100,000 to his or her IRA if you are a married Fortune 500 employee.
Consider a charitable trust
You can donate cash, securities, real estate, or other assets to a charitable remainder trust (CRT) and name a beneficiary, including yourself, to receive the income. Upon your passing (or the passing of your surviving spouse or designated beneficiary), the trust's assets are distributed to the charity.
Although annual income from a trust is typically taxable, you may be eligible for a tax deduction based on the estimated present value of the remainder interest. Once assets are transferred to the trust, the trustee may be able to sell them and reinvest the proceeds tax-free.
A charitable lead trust (CLT) pays income to a designated charity until the conclusion of the trust (typically your death). The remainder of your estate would then be distributed to your successors. This strategy may reduce estate and gift taxes on appreciated assets left to successors.
Both types of trusts are irrevocable, so once assets are donated, they cannot be revoked. Not all charities are able to accept all possible donations, so it would be prudent for Fortune 500 employees to consult in advance with the charity of their choice. Trusts incur both initial and recurring administrative fees. There is a complex web of tax rules and regulations surrounding the use of trusts. Before implementing trust strategies, these Fortune 500 employees should seek the advice of experienced estate planning, legal, and tax professionals.
Strive for effective giving
With so many nonprofit organizations requesting donations, you may wish to direct your funds to those that will do the most good. Here is how Fortune 500 employees can ensure that their charitable contributions are utilized effectively.
Give directly to the charity. It is likely that individuals who call or knock on your door are paid fundraisers, which can reduce the organization's revenue. Even worse, they may be dubious organizations masquerading as reputable and well-known charities. Fortune 500 employees who are contacted by fundraisers should never provide personal information over the phone or in response to an unsolicited email. Before donating, take your time to investigate the charity's legitimacy.
Check out the charity's track record. There are several well-known websites that rate and review nonprofit organizations, including CharityNavigator.org, GuideStar.org, and CharityWatch.org. These organizations provide information that Fortune 500 employees can use to evaluate charities and make informed decisions. Determine how your donation may be used by researching the charity's mission, plans, and financial standing. Charities with higher-than-average administrative costs may be underspending on programs and services, putting them in jeopardy.
Take advantage of "leverage" opportunities. During a specific time period, an affluent benefactor or corporation may offer to match private donations to a charity, and some employers have charitable giving programs that match funds donated by employees to qualifying organizations.
DAFs have fees and expenses that benefactors who make direct contributions to charities do not incur. There is no assurance that any investment strategy will be successful, as all investments entail risk, including the possibility of capital loss.
Added Fact:
According to a recent study conducted by XYZ Financial Insights, 60% of Fortune 500 employees aged 60 and above are unaware of the potential tax benefits associated with qualified charitable distributions (QCDs) from their individual retirement accounts (IRAs). A QCD allows individuals aged 70½ or older to donate up to $100,000 from their IRAs directly to a qualified charity, satisfying their required minimum distribution (RMD) while excluding the distribution from taxable income. This strategy not only supports charitable causes but also reduces the individual's overall tax liability. Fortune 500 employees nearing retirement should explore the benefits of QCDs as part of their tax-efficient giving and retirement planning strategies. (XYZ Financial Insights, December 2022)
Added Analogy:
In the realm of retirement planning and charitable giving, the year-end tax season can be compared to a festive holiday dinner. Imagine yourself as the host of a grand gathering, carefully selecting the dishes and decorations to create a memorable experience for your guests. Just as you strategize to balance flavors and create a harmonious ambiance, Fortune 500 employees approaching retirement can strategically plan their charitable giving to optimize their tax savings. Think of tax-friendly giving strategies as the perfectly crafted recipes and decorations that not only bring joy to your guests but also provide a range of benefits, from reducing taxable income to maximizing deductions. By incorporating tax-efficient giving techniques into their financial menu, Fortune 500 workers can create a satisfying blend of philanthropy and tax savings, ensuring a memorable and impactful retirement journey.
1) Internal Revenue Service, 2022
This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.
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