It’s the most wonderful time of the year, which means that in addition to trying to pull off last minute shopping in the middle of a supply chain crunch, you are also considering year-end tax planning and gifting strategies. Since you’ve only got a couple weeks to do it all, we’ve done your homework for you. Below are five year-end strategies you may consider.
Process a Roth IRA Conversion: We are leading off with this one because it may take the most time and discussion with your professionals. The reason to convert to a Roth is to change your retirement dollars from taxable to tax-free. To do that, you pay taxes now on your Traditional IRA (or 401k) and let the funds grow in your tax-free Roth. It makes sense for people in the lower tax brackets, since the amount of tax you will pay depends on your other sources of income as well. We wrote a recent blog about this strategy with case studies – check it out to see if it might be a fit for you. Oh, and call your CPA in a hurry if you want them to help you analyze the amount you should convert.
Give money to your family or friends: You can gift up to $15,000 this year to as many people as you want without filing a gift tax return. If you have had a particularly lucrative year, and have funds that you can give away, you might consider giving funds to family members or even friends. What if you want to give a gift – maybe to a child or grandchild - but you have an opinion about how the money is spent? Consider taking the time to tell the recipient what you hope the money will do for them, and then hope to be impressed. Who knows – maybe they really will give some charity, and put the rest towards their own financial goals.
Gift stock or other asset to a charity: With the performance of the stock market over the past 18 months, you may have highly appreciated stock that you would be taxed on if you decided to sell it. However, if you give the stock to a nonprofit, neither you nor the nonprofit pays tax on the gain. Even better – you can deduct the full price of the stock that you give to your charity of choice.
| IF YOU SELL STOCK | IF YOU DONATE STOCK |
PURCHASE PRICE | $1500 | $1500 |
GROWTH | $1000 | $1000 |
TOTAL ACCOUNT VALUE | $2500 | $2500 |
TAXATION [15% of $1000] | $150* | $0 |
AMOUNT YOU DONATE | $2350 | $2500 |
*Using the 15% cap gain rate. | ||
Start or fund a Donor Advised Fund. A Donor Advised Fund (DAF) was designed like many other types of tax advantaged plans to simplify and encourage the process of taxpayers using their funds wisely. Much like the 401(k) was designed for retirement and the 529 Plan was designed for education, the DAF was designed to encourage taxpayers donating funds to charity. DAFs are easy to set up and fund, and provide flexibility and control to donors who want to fund their charitable goals strategically, as opposed to doing so primarily to hit a year-end tax deadline. The basic idea is that you receive a tax deduction the year you fund your DAF, and can decide in future years where you direct those funds. DAFs also provide unique advantages to donors who want to maintain anonymity, and are an especially good match for those who have inconsistent income year-to-year, or even a liquidity event (talking to you, entrepreneurs).
Look for matching opportunities to double or triple your impact. How can you do this? If you work for a company that provides a match for employee gifts to nonprofits, ask your HR department for a list of ways that your employer can support you. You can also talk to your favorite nonprofit to find out if they have a donor match program that is active. Or, if you plan to make a sizable donation or had a liquidity event of your own, you could be the one providing matching funds for other donors.
At BFS Advisory Group, we know that giving money away is a key element for many as they consider how to use their money to have the lives they want. We also know that communities are stronger when we all take care of each other. If you need guidance on how to be more strategic with your philanthropic goals, contact us at hello@bfsadvisorygroup.com.
Debra Brennan Tagg is a CERTIFIED FINANCIAL PLANNER™ Professional and the creator of the DBT360 Financial Plan, a proprietary program that helps her clients prioritize their goals, leverage their resources, and address their risks. She is the president of BFS Advisory Group and teaches the public and the financial services industry about the importance of values-based financial planning and investor education.