For many individuals, the holidays are often when they consider supporting their favorite charities. Donating in a tax-efficient manner may allow you to contribute even more to those organizations you wish to support.
As a result of the current state and local tax federal deduction limitation of $10,000, many taxpayers are now taking the standard federal deduction ($12,000 individual, $24,000 joint) as opposed to itemizing. Here are some of the charitable deduction strategies to consider:
The CARES Act did make two changes related to charitable giving for 2020 and 2021. Taxpayers utilizing the standard deduction can now claim an above-the-line deduction of up to $300 to qualified charities (not including DAFs and private foundations). Also, the limit on cash contributions to qualified public charities increased from 60% of AGI to 100%.
To help minimize any previously realized capital gains, consider selling stocks, bonds, or other funds that have declined in value since you purchased them.
For example, selling a security with a $10,000 loss could save you up to $2,380 in federal taxes plus another few hundred in state income taxes. You can even keep your market exposure by immediately investing in an ETF or mutual fund within a similar sector. Just be careful of the IRS's wash sale rule, as your new investment cannot be substantially identical to your original investment.
With the lifetime estate tax exemption of $11.58 million sunsetting in 2026 (and potentially on the chopping block every year), taxpayers with substantial estates are concerned that their estates will be subject to estate taxes. One option to minimize this concern is to avail yourself of the annual gift exclusion of $15,000. You can gift up to $15,000 to as many friends and family members as you wish. If you are married, you and your spouse can double the gifts to $30,000 per year. For those looking forward to 2022, the annual gift tax exclusion will be increasing to $16,000 per donor/donee.
If you have had significant changes to your life over the past year, then now is time to double-check your tax withholdings. Marriage, divorce, purchasing a new home, and welcoming a new child are just some of the life-altering events that can also impact your tax return.
Accelerating large purchases of business assets into 2021 will allow you to immediately benefit from the tax deduction they will provide. However, you should also consider your expected income level next year. If you are anticipating earning much more income in 2022, deferring the purchase can provide even more tax savings.
Are you now running a small business out of your home? Have you added a swimming pool to your house? If your life has changed recently, you may wish to consider adding an insurance rider or an umbrella policy to give yourself extra protection in case of an injury or accident.
Also, you should keep in mind that purchases of highly unique or expensive items will generally not be covered by your homeowner's insurance. So, you may wish to add an insurance rider for fine art, jewelry, or collectibles.
As you reconnect with your family members over the holidays, you may wish to take this opportunity to tell them your latest estate and legacy goals. Also, you should consider the extent that your life has changed recently and whether your estate planning documents and other important financial documents are up-to-date.
Here are five key questions that you should ask yourself:
If you have questions about your financial situation please contact us. Perhaps you have recently experienced a significant life event, or retirement is on the horizon? No matter your circumstances, we welcome the opportunity to provide you with sound financial advice, strategic tax planning, and help achieve your lifetime goals.
We hope you have a safe, healthy, and joyous holiday season.
1Donor-advised funds (DAF): a charitable giving vehicle administered by a public charity that manages charitable donations for organizations, families, or individuals; an alternative to direct giving or creating a private foundation. Provides administrative convenience and cost savings to donors, by conducting grantmaking through the fund.
Investment advisory services offered through GW & Wade, LLC.
The information provided above is the opinion of the author, general in nature and is not intended to represent specific investment or professional advice. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship. Diversification and asset allocation do not ensure a profit or guarantee against loss. Past market performance is not a guarantee of future results.
Tax laws referenced and specific rates are subject to change.
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