Money Saving Tax Tips


While most people I know would love a respite from the news (which has been largely sour all year), it’s hard to shut it off. Yet, even with all the uncertainty in our world, your financial situation never stands still.

I encourage you to remain proactive. 

With that in mind, there are things you can do that save you moneyandsupport a cherished non-profit - which can help you feel better about the world. (And don’t we all need a little of that, right now?)

As an advisor with over 30 years of experience, I’m a big advocate of the win-win that is giving to charity while simultaneously lowering your tax burden. Not only is donating undeniably great for the recipient, studies have shown that it’s also good for your physical and emotional well-being.

What is a charitable tax deduction?

Itemizing your deductions can reduce your taxable income. An itemized deduction is a donation or expenditure toward an eligible product, service, or organization that can be subtracted from your adjusted gross income (AGI) to lower your tax bill.

You should consider itemizing (claiming) your deductions when their total amount surpasses the amount of the standard IRS deduction, which, for 2020, is $12,400 for individual filers, and $24,800 for married couples filing jointly. (Speak to your advisor and your accountant before using this strategy.)

So, what are some of the approaches that I might advise a client to take that could lower their tax burden?

Donate your RMD (from your IRA) directly to a charity

Something that happens quite a bit is that good savers don’t realize that they shouldn’tautomaticallywait until they are forced to start taking required minimum distributions (RMDs) from their IRA(s) to begin withdrawing money from those types of accounts (the same may apply to your 401(k)).

Yes, it feels great to have that money stashed away, out of sight, growing free from taxes year-after-year-after-year. But then you turn 72 (or 70½ before 2020), and your RMD (which is based on a complex formula that considers your retirement account balanceandyour life expectancy) is so large, it bumps you into a higher tax bracket and Uncle Sam sees more of it than you.

It’s all in the planning, because the first rule of donating distributions from a retirement account such as an IRA is to not make any errors.   

Whether you are already taking RMDs from your IRA, or you’re going to begin soon, one potent tax-saving maneuver is to donate a portion (or even all) of it to charity. Called a qualified charitable distribution (QCD), you can lower your tax burden by donating up to $100,000 a year ($200,000 for couples). While, in this scenario, you don’t get a straight itemized write off, so long as it’s made directly, you won’t owe taxes on the gift because it doesn’t count as income.

The types of accounts that are almost always eligible for QCDs are traditional IRAs, SEPs, and simple IRAs. But, remember, mistakes are costly, and the IRS doesn’t have a sense of humor.

For instance, unlike an IRA, you can’t donate your RMD from a 401(k) until you’ve rolled that money overintoan IRA. Otherwise, you’ll trigger a tax bill. Also, you can’t take an RMD and then later donate that money and then receive the same tax benefits. Besides other penalties and drawbacks, just for starters, this might impact how much your Social Security gets taxed.

So, how much can you save?

Let's look at an example. According to the AARP, if you are in the, say, 22% tax bracket and you direct $5,000 of your RMD to a qualified charity, you save about $1,100 in federal income taxes. While not the same as itemizing, this should reduce your adjusted gross income, making it the same as if you’d gotten a deduction.

What about donor-advised funds?

Called “The Waiting Room for Charitable Donations,” a donor-advised fund (DAF) is a charitable giving mechanism established by a public charity. It’s something like a charitable investment account, whereupon your stored assets are invested, and later donated.

In this scenario, you get an immediate tax deduction, the funds grow tax-free, and then later you can direct those funds to a qualified charity of your choosing.

While their immediacy and flexibility mean that DAFs are getting ever more popular (from 2017 to 2018, the number of DAFs grew by 55%), they have pros and cons. For instance, on the plus side, besides the tax deduction, you can take your time and decide which charities you want to support. The fact is that DAFs can be terrific for people who have experienced a windfall (say, after selling a business) that is going to increase their tax exposure.  

On the downside, some critics assert that DAFs keep nonprofits from building personal relationships with donors, which, when you consider that no donor information is available to the charity, might well be true. Conversely, it’s difficult to assume that the money would automatically be available to the charity were it not for the tax advantages of the DAF to the donor.

In closing, while hanging on to as much of your hard-earned savings as possible takes a plan, always speak to your accountantandyour advisor before undertaking any new tax strategy.

And while forward-thinking tax planning should be an important part of every person’s short and long-term approach to money, the entirety of your situation needs to be examined for your financial professionals to know exactly which strategies you should pursue.On that note, it’s never too early to secure your tax preparation or accounting services for the future