Six tax strategies you should know

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.

Understanding the tax strategies related to charitable contributions can help you decide how much to give, what asset to give and when to give. To provide the maximum amount to charity—and receive the maximum tax advantages for yourself, consider these strategies:
 

Go beyond cash donations. Charitable contributions of complex assets – such as private C-and S-corporation stock, restricted stock, limited partnership interests and real estate – can enable you to minimize capital gains taxes while taking an income tax deduction equal to the full current market value of the donated asset, not just the cost basis. See the full list of assets accepted by Fidelity Charitable.

Combine multi-year deductions into one year.  Many taxpayers won’t qualify for the necessary deductions to surpass the standard deduction threshold established by tax reform in 2017. However, you can still receive a tax benefit by “bunching” multiple years’ worth of charitable giving in one year to surpass the itemization threshold. In off-years, you take the standard deduction. Use our Charitable Giving Tax Savings Calculator to estimate your savings. 

Plan for retirement. If your tax bracket is higher now than what is expected in the future, consider frontloading charitable giving by making a large contribution to a public charity with a donor advised fund program now, rather than smaller gifts later in retirement. Not only will you gain the possibility of tax savings in the present year, but you will also have charitable contributions set aside to recommend as future grants, allowing you to continue supporting charities generously on a fixed income.

Rebalance your portfolio. Many shrewd investors perform routine portfolio rebalancing to ensure that their investment mix is consistent with their goals. Often this involves selling investments that have done well, which generates capital gains taxes in the process.

One simple offsetting measure is aligning your charitable giving with the rebalancing process. Instead of writing a check to a favorite charity this year, consider donating your most highly appreciated security, which you have held for over a year. Capital gains taxes typically will not apply to you or the charity receiving the donation, and because you didn’t write a check, you may have cash available to purchase more stocks as part of your rebalancing exercise.

Convert a traditional to Roth IRA. Converting a traditional IRA to a Roth IRA typically means paying significant taxes, but making a charitable contribution can help offset that income. This strategy may work if you already donate regularly to charity, have sufficient non-retirement assets to pay the cost of the conversion and would consider making a larger-than-usual charitable donation to Fidelity Charitable to establish a Giving Account in the year of the conversion.

Estate Planning. By naming Fidelity Charitable in your will or as a beneficiary of a qualified insurance policy, retirement plan or trust, you reduce or even eliminate the burden of estate tax for your heirs.  Your Giving Account continues to support the charities you love and your legacy lives on. (It is important to consult your tax and estate planning advisors regarding modifications to your estate plans.)

The tax information provided is general and educational in nature and should not be construed as legal or tax advice. Fidelity Charitable does not provide legal or tax advice. Content provided relates to taxation at the federal level only. Charitable deductions at the federal level are available only if you itemize deductions. Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy or completeness of the information provided. As a result, Fidelity Charitable cannot guarantee that such information is accurate, complete or timely. Tax laws and regulations are complex and subject to change, and changes in them may have a material impact on pretax and/or after-tax results. Fidelity Charitable makes no warranties with regard to such information or results obtained by its use. Fidelity Charitable disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.