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November 12, 2019

How to Claim More Tax Deductions before the New Year

by Magali Cohen

Those who give shall receive tax deductions. There are a few different ways of donating to charity and receiving a benefit, even if you do not itemize your deductions. In this article, we will discuss how this is possible.

Here are some ways to increase your tax deductions.

  1. Gather items that you no longer use such as old toys, furniture, clothing, household items, etc. and donate them to Goodwill or a similar organization.
  2. Open a Donor Advised Fund.
  3. Donate all or some of your Required Minimum Distribution from your IRA (this is known as a qualified charitable donation, or QCD).

Gather non-cash contributions

It is a great idea to do a closet and garage cleanse before the end of the year if you can find the time in between holiday shopping. Doing this leaves you with less clutter and fewer taxes to pay if you itemize your tax deductions.

Getting rid of unnecessary clutter doesn’t have to be a chore. You can make closet cleaning a fun task by inviting a friend over to help. Get your significant other involved by asking their opinion on items of clothing you are considering getting rid of. You can promise your kids that they won’t get coal in their stocking if they help you clean the garage of items that they no longer use.

If you are planning on selling your home soon or moving, cleaning out your house is a good idea for you as well. Having fewer items in your home means fewer boxes are needed to move your possessions, making your move less expensive and less time-consuming.

Make a list of the items you donated and assign them a value; this should be what you think you would get for the item if you sold it to a thrift shop. Keep in mind that if you donate a collective of $500 or more, you need to assign each item a specific value. Items that are worth $5,000 or more need an appraisal. Remember to keep your receipts
for your 2019 tax preparation!

Open a Donor Advised Fund

Consider opening a donor advised fund through a mutual fund company like Charles Schwab. This is a great way to donate to your favorite organizations in an organized fashion. You can donate cash, stocks, or even real estate through this fund. If you are a charitable person who often donates large sums, this is a great option for you.

Let’s take a look at an example of how this works. Say you were planning on donating $30,000 to an organization and you have a taxable account with Rowling & Associates. You can transfer $30,000 worth of stock to the donor advised fund and receive a deduction for that amount. The donation is based on the fair market value of the stock at that point rather than what you purchased it for. If you had purchased that stock for $20,000, you are saving tax on the $10,000 gain you would have realized had you sold it first and then made the donation, rather than transferring the stock to the donor advised fund. This is a great way to receive a charitable deduction and to save on capital gains taxes you would have paid.

Donate all or some of the Required Minimum Distribution from your IRA

If you are 70.5 years or older, you are required to make a distribution from your traditional IRA every year. This is a great way to receive a deduction if you do not itemize. Often, retired individuals have already paid off their mortgage, which significantly lowers their tax deduction since they no longer have mortgage interest to write off. This sometimes prevents these individuals from receiving any tax benefit from donating to charity.

With the Tax Cut and Jobs Act (TCJA), even fewer individuals can itemize their tax deductions. Qualified charitable deductions are super useful for these individuals as they have the opportunity to donate to the organization of their choice to lower their retirement income. This can also put retired individuals in a lower tax bracket – which is like having lower taxable income as a non-retired individual receiving a pre-tax deduction for a 401(k) plan.

Year-End Tax Planning

If you would like more information on charitable giving options and which strategies might be the most beneficial for you, contact the Rowling & Associates tax team for year-end tax planning.

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