With respect to charitable donations, you may reap a larger tax benefit by donating appreciated assets, such as stock, to a charity. Generally, the higher the appreciated value of an asset, the bigger the potential value of the tax benefit. Donating appreciated assets not only entitles the taxpayer to a charitable contribution deduction, but also avoids the capital gains tax that would otherwise be due if the taxpayer sold the asset.
Additionally, because taxpayers 70 ½ years old and older who own an individual retirement account (IRA) must take minimum distributions from that account each year and include those amounts in taxable income, a special provision allows such taxpayers to make a charitable contribution directly from their IRAs to a charity. This has several benefits. First, since charitable contributions deductions are usually only available to individuals who itemize, a taxpayer who takes the standard deduction can benefit from this rule. Second, by making a contribution directly to a charity, the donation counts towards the taxpayer’s required minimum distribution, but that amount is not included in income – and thus reduces taxable income and adjusted gross income (AGI). A lower AGI is advantageous because it
increases the taxpayer’s ability to take medical expense deductions that might not otherwise be available. In addition, the reduction in AGI decreases the amount of the taxpayer’s social security income subject to income tax and, possibly, the 3.8 percent net investment income tax if the taxpayer has a lot of investment income.
Have a question or want to get in touch?
Contact Us
