Unfortunately, income tax doesn’t disappear in retirement. In fact, your retirement accounts can be taxed differently, depending on the type of accounts, investments, and portfolios you have. This can lead to higher taxes than you’re used to paying.
While taxes in retirement can be a challenge, it doesn’t have to be a source of stress. By leveraging charitable giving tax strategies and working with a financial advisor to create a personalized plan, you can effectively manage your tax burden and ensure that your hard-earned savings support the causes and loved ones that matter most to you for years to come.
Why is Charitable Planning Important for Retirees?
- It offsets unforeseen tax liabilities. When you or your financial advisor make a strategic decision about your financial plan, like rolling over an IRA into a Roth account or rebalancing your portfolio, you might get stuck with capital gains taxes. Charitable contributions can offset your liabilities by reducing the amount you owe.
- It prepares your family for unexpected expenses. Setting up your estate plan to incorporate more charitable giving can help offset things like death taxes—yes, the government can still tax you after you pass away! With charitable planning, your family can steward your estate more effectively without additional tax burdens.
- It reminds you of what you care about most. This is more of a philosophical reason, but it’s still true. When the end-of-year tax receipts come in, you can look back at how the resources you’ve been given have blessed others—you supported your church, gave back to an organization you care about, or offered financial aid after a crisis. All of these things matter far more than tax implications.
Current Federal Tax Laws As Of 2024
IRS tax codes are constantly changing. Currently, tax laws in 2024 are favorable toward charitable giving. In 2020 during the COVID-19 pandemic, Congress expanded eligibility for tax benefits to encourage charitable giving. Lawmakers are currently working to reinstate this eligibility and make it permanent.
Here are the basics of the current federal tax laws in 2024:
- You can deduct up to 60% for cash contributions and 30% for appreciated assets like stocks or bonds.
- You are still required to itemize your deductions. The standard deduction amounts for 2024 are $13,850 for single filers and $27,700 for married filing jointly.
- Only contributions to 501(c)(3) organizations are considered.
- Tax receipts are required to deduct.
Tax laws also vary by state. Some states allow income tax deductions on charitable donations and others do not.
Financial advisors can help implement long-term giving tax strategies so you can support the causes you care about and reduce your tax bill. In the next section, we’ll consider a few of these strategies.
Charitable Giving Tax Strategies to Consider
Now that you have a better understanding of the current tax laws, let’s take a look at how charitable giving strategies can influence how much you owe from year to year.
1. Consider Contributions Other Than Cash
Long-term appreciated securities—like stocks, mutual funds, and bonds—make great charitable contributions. Since their value grows over time, they can become a more significant contribution to a non-profit. When you contribute them directly to a charity, capital gains taxes are avoided. You’ll receive a greater tax incentive than if you contributed the after-tax money from selling the securities.
2. Align Your Charitable Giving with Portfolio Rebalancing
Most financial advisors don’t set and forget your investment portfolio. Periodically, they do what’s called rebalancing—adjusting your investments so they still align with your financial goals, risk tolerance, and income needs. When this happens, a financial advisor might sell some of your existing investments, which can result in hefty capital gains taxes.
Work with your financial advisor to plan a robust charitable giving strategy around the time rebalancing occurs. Similar to what we already discussed, you can donate one of your appreciated securities to an organization to avoid capital gains taxes altogether.
3. Consider Carryforwards
In some tax years, you may reach the maximum percentage of taxable income. In these cases, you can carry charitable donations forward for up to five years. These are called tax carryforwards. Planning potential carryforwards can help you reduce taxes in the future, especially if you know big life changes are coming up. For example, if you know you are going to sell your house in the next five years, keep track of your carryovers to offset potential capital gains taxes from the sale.
4. Always Think Ahead
Charitable planning tax strategies only work if you continuously think ahead. Many things can change quickly in retirement. You may increase your spending from one year to the next or even find yourself in a different tax bracket. You may find yourself in need of temporary or long-term care. Your estate plan might change.
Because so much can change in retirement, your taxes can change as well. Having a financial advisor skilled in charitable planning tax strategies can help you look long-term, not just from year to year.
A Charitable Strategy Can Create More Joy
Not only can charitable giving tax strategies benefit your wallet—they can help you spread more joy. With these strategies, you can make an impact on more causes that you care about. With fewer tax implications to consider, your dollars can go farther.
The road ahead is easier if you have an experienced financial advisor by your side. Our team at Generous Wealth can help you implement an effective charitable giving strategy. Curious to learn more? Schedule a complimentary call with us today!
The information in this blog is for educational purposes only. It is general in nature and does not take your personal circumstances into consideration. It is not intended to be a substitute for specific, individualized financial advice and you should obtain legal and tax advice from a qualified tax professional or attorney. You should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice. The information and commentary provided in this blog, including any strategies, methodologies, references to tax laws, and opinions, are expressed as of the date hereof and are subject to change. EverSource Wealth Advisors, LLC assumes no obligation to update or otherwise revise these materials.
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