Also serving the communities of De Luz, Rainbow, Camp Pendleton, Pala and Pauma

Turning your tax situation from an ugh into a hug

As the often-dreaded tax season approaches, I’m going to give a gentle reminder to think about those year-end plans. Yes, those 2025 plans. I know, I can practically hear the “ugh” as you’re reading, but seriously, yes, planning now will allow people to reap tax rewards a year from now.

In full disclosure, I do not have any kind of crystal ball; however, with the Federal Reserve halting its interest rate hikes, possibly making several decreases by summer, and the stock market doing a bit of a happy dance for the first three months of this year, you can take advantage of a good situation.

Let’s talk about charitable planning. People do like tax benefits, but that’s not why anyone should consider giving charitably. That’s just a sweet cherry on top of the sundae. The reason to give to a charity is because you want to help others and make a difference. The tax benefits work best if you’re charitably inclined from the get-go.

Let’s just say that if you do not generously support your favorite charities and causes currently, it’s best to consider the motivation first and not the tax implications.

Let’s talk about “bunching” which is a concept that has been around for a while. But it gained more recognition in recent years because of the increased standard deduction and the difficulty many taxpayers have getting over that higher tax hurdle. Bunching gifts allows taxpayers to optimize donations by strategically timing and consolidating them to achieve greater tax benefits.

Depending on overall circumstances, there can be advantages to bunching two years’ worth of donations into a single tax year and giving every other year rather than donating the same amount every year.

For example, let’s say you have potential deductions of $10,000 in mortgage interest payments and $10,000 in property taxes, and you want to give $7,000 to a favorite cause as a charitable contribution. You may not have enough in deductions to break through the standard deduction threshold, which is $27,700 for a couple in 2023, so there’s zero tax benefit for making the contribution.

Instead, bunch two years’ worth of $7,000 charitable donations into the same tax year so the standard deduction level is exceeded by $6,300. And it means a reduction of taxable income by that amount. Then, the following year, take the standard deduction.

Even with stock market volatility over the last couple of years, it’s likely that investors own individual stocks or mutual funds in their brokerage account which have appreciated significantly.

If you were to sell that stock to generate cash for your charitable gifts or even for portfolio diversification purposes, the gains would likely be subject to capital gains tax. Instead, consider donating an equivalent amount in stock and avoid capital gains tax altogether.

Neither you nor the charity are on the hook for the tax bill. Keep in mind that a security must generally be held for longer than one year for you to take a charitable deduction equal to the fair market value of the donated security.

Donate your appreciated stock, and if you think today is the day where stock you’ve held onto for a while is at its best value, transfer it. It will take more planning than writing a check as you will need to make sure the charity you’ve chosen has a brokerage account and can accept a stock transfer. It often takes up to a week for the transfer to complete.

On the date of the stock transfer, usually the date your broker writes the transfer request, the charity will acknowledge the gift, calculating the high, low and average of the stock price to send you written, IRS-approved language for documentation. The process isn’t difficult, but it shouldn’t be an exercise you leave until mid-December if you want it completed by year-end.

If a nonprofit organization doesn’t have a brokerage account but it does have an existing relationship with a community foundation, the stock can be transferred to the community foundation and the dollar amount can be added to an existing fund supporting a specific charity or charitable cause or used to create a new one.

If you’re charitably inclined, you’ve likely put a lot of thought into what causes matter most to you and how much you want to donate to them annually. Go one step further and evaluate the diverse methods for optimizing your charitable giving each year.

Proper planning is essential, and it’s important to work with a qualified tax professional or financial adviser to determine if any of these methods align with your tax situation and personal financial plan. It is a great way to feel even better about giving your charitable hug, instead of the tax ramification ugh.

Jean Larsen is executive director of Legacy Endowment Community Foundation.

 

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