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How Did You Do on the Finance 1040 Final Exam?

Posted May 2024

Many Americans were likely tempted to let out a sigh of relief when the April tax-filing deadline passed. True, it is tempting to simply set aside tax-filing concerns until next year, but it may be beneficial to view a tax return as a “final exam” on how well we did with our personal financial planning for the past year.

Like the final exams we remember from our school days, our tax return might show that we should have invested a little more time in planning in certain areas—perhaps revealing a list of “Things I wish I had done last year.” Often, this kind of review underscores missed opportunities to reduce taxes by being more intentional with our charitable planning. Here are just a few strategies that may be beneficial for planning this year and in future years:

Bunch deductions. If itemized deductions come close to but fall short of the standard deduction for which a donor qualifies, it may be better to push some of those deductible expenses into the current year. And adjusting the timing of charitable giving is often the most flexible way to do that.

Consider this example of one of our donor couples. They have potential itemized deductions within $1,000 of their standard deduction and want to make a tax-wise gift to us. Typically, they give $5,000 each year to support our mission but decide to give an additional $5,000 this year then skip their regular gift next year. Doing so would push their total deductible expenses $4,000 beyond the standard deduction, saving them as much as $1,480 in federal income tax. Bonus: Next year, they will still be able to take the standard deduction even though they accelerated their gift into the current year.

Keep the cash, give the stock. Rather than selling stock or other investments that produced a taxable capital gain and using the proceeds to make charitable gifts, consider making a gift of the stock itself. Appreciated stock held for more than a year can produce a deduction for its current full fair-market value regardless of the original cost basis. In this scenario, the example donor couple above would not have to recognize or pay tax on any of the appreciation. Bonus: They also avoid the capital-gain tax whether or not they itemize deductions.

Direct an RMD to us. When we reach the age when a required minimum distribution (RMD) must be taken from retirement accounts, those distributions are typically taxable. But when making a qualified charitable distribution (QCD) directly from an IRA to us, the amount transferred—up to a maximum of $105,000 for 2024—will reduce the amount of RMD that must be taken from the IRA, thereby reducing taxable income. Possible Bonus: This plan may also reduce the dollar amount of Social Security payments subject to federal income tax.

We would welcome the opportunity to assist you in planning your gift to support our work. Please feel free to contact our office if we can be helpful in any way.

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