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Tax strategies

Optimize your charitable planning for maximum tax savings

Tax strategies are ways to use the provisions of the tax code to make the smartest financial decisions—often with an eye to minimizing taxes. Understanding the tax strategies related to charitable contributions can help you decide how much to give, what asset to give and when to give, so you can provide the maximum amount to charity—and receive the maximum tax advantages for yourself.

According to the report Giving USA, U.S. families and individuals give an average of more than $1 billion to charity every day—a major force for addressing important needs in our communities. The value of giving is also recognized by the U.S. tax code, which provides a variety of tax incentives to support those who wish to use their funds to do good. By using the proper tax planning strategies, charitable contributions can reduce three kinds of federal taxes: income, capital gains and estate taxes.

By understanding these key strategies, donors may be able to give more and provide even greater benefits to the causes they care about.

What tax strategies can be used for charitable contributions?

Many people know they can deduct donations to charity from their income taxes, but increasing your knowledge of tax planning strategies can maximize your giving impact.

For example, did you know that:

  • If you donate long-term appreciated assets, like stocks or mutual fund shares, not only are you eligible to take an income tax deduction for the full market value of the securities, but you may also avoid triggering any capital gains tax, as you would if you sold the securities.
  • If you make a charitable contribution above the IRS limits, you can carry the deduction forward for the five following tax years.
  • When considering your estate, it might be more tax-savvy to leave some types of assets, like stock, to heirs and donate other types of assets to charity.
  • You can use charitable giving alternatives, such as trusts, foundations and donor-advised funds, to support your giving, but each of these can have very different tax implications. Compare charitable vehicles for giving.

How to defer or reduce taxes through charitable giving

  • Income tax strategies—Donations to charities qualify for an itemized deduction from income. Because the tax rate is then applied to a reduced income, this can minimize your overall tax liability. Many donors don’t realize that there are many ways to maximize this seemingly straightforward deduction. For instance, you can “bunch” your charitable contributions in a single tax year, using a donor-advised fund, to increase the amount you donate in a high-income year, and then the funds can be used to support charities over time. Or you can make a combined gift of appreciated assets and cash to maximize your benefits.
    Learn about nine ways to reduce your income taxes in a high-income year through charitable giving.
  • Capital gains tax strategies—You can use charitable contributions to eliminate your capital gains tax on donations of long-term appreciated assets. Not only can you deduct the fair market value of what you give from your income taxes, you can also eliminate capital gains tax of up to 20 percent on any of the gain. Assets subject to capital gains taxes can include investments like stocks or mutual funds, or hard assets like real estate. They can include assets that are both publicly traded or nonpublicly traded. For example, some givers donate shares of a private business before it is sold to dramatically increase their charitable impact.
    Learn more about strategies for donating appreciated assets of all kinds.
  • Estate tax strategies—The federal estate tax is a tax on the transfer of your property at your death. In 2017, the Internal Revenue Service required estates with assets, plus prior taxable gifts, of more than $5.49 million to file a return and pay taxes at a rate of 40 percent. Beginning in 2018, this asset threshold nearly doubled, so fewer estates will be subject to this tax.
    By making properly structured gifts and donations, you can remove assets from your estate before the total is tallied and taxed. In fact, you have an unlimited charitable deduction if your estate plan tells the executor to distribute holdings to charities.
    Charitable tax strategies for estate planning purposes can be among the most complex, and it typically makes sense to consult a professional. Commonly used strategies include the use of charitable trusts and careful selection of assets for distribution to various beneficiaries—charitable and otherwise. For example, leaving an IRA to charity and appreciated securities to individuals might allow your heirs to inherit more because of the differences between how these assets are taxed.

Tax strategies and federal income percentage limits

Charitable tax strategies related to income, capital gains and estate taxes all have one thing in common: their value to you goes up with your tax bracket or estate value. Under the tax code, those with higher incomes are taxed progressively at a higher rate. The current top federal tax rate is 37 percent. Similarly, those in the top tax bracket also pay the top rate on long-term capital gains—20 percent. Those in lower brackets will pay 15 percent or nothing at all.

In practical terms, this means that the higher your tax bracket, the more valuable your deduction. It also means a strategic approach to taxes and giving involves looking at your tax rate if you expect any variability. For example, it can make sense to give more while you’re working if your tax bracket is higher than it will be in retirement—perhaps by contributing to a donor-advised fund that can be used through retirement to support the charities of your choice.

Donor-advised funds can help as you plan your tax strategies

A donor-advised fund is a dedicated account for charitable giving. When you contribute to a charity that sponsors a donor-advised fund program, such as Fidelity Charitable, you are eligible for an immediate tax deduction. You can then recommend grants over time to any IRS-qualified public charity and invest the funds for tax-free growth.

Donor-advised funds provide many benefits for organizing and planning giving, but they also offer advantages in terms of income, capital gains and estate taxes. In some cases these benefits are more advantageous than those from contributing to a private foundation.

  • Cash donation—If you donate cash, via check or a wire transfer, you are usually eligible for an income tax deduction. It can be as high as 60 percent of your adjusted gross income.
  • Long-term appreciated assets—If you donate long-term appreciated assets like bonds, stocks or real estate to charity, you generally don’t have to pay capital gains, and you can take an income tax deduction for the full fair-market value. It can be up to 30 percent of your adjusted gross income.
  • Estate taxes—A donor-advised fund can be a beneficiary of an estate or charitable trust and can be used to create a charitable legacy.

Take a six-question quiz to discover if a donor-advised fund could be right for you.

Fidelity Charitable can help

Improve your giving strategy

Since 1991, we have been helping donors like you support their favorite charities in smarter ways. We can help you explore the different charitable vehicles available and explain how you can complement and maximize your current giving strategy with a donor-advised fund. Join over 100,000 donors who choose Fidelity Charitable to make their giving simple and more effective.

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