By: Sharon Zinger, CPA
Charitable Donations
Now that the holiday season is in full swing, many charities are revving up campaigns to encourage donations. While donating to a good cause can warm your heart, it can also help lower your tax liability. Charitable donations for the year are reported on the Schedule A of a 1040 for Individual Taxpayers and can be included in deductions for businesses. For Individuals, please keep in mind that your schedule A is in lieu of your Standard Deduction. If your total Schedule A Deductions is less than your standard deduction, then your charitable donation is not eligible for a deduction.
For a donation to qualify, it must be donated to an organization with 501(3)c status. You should be able to obtain a receipt for any charitable donation over $75 to submit to your tax professional. Some donations that are not deductible include political donations, gifts to loved ones because they are in need, contributions for foreign charities (excluding certain Canadian, Israeli, and Mexican charities), contributions of service, and charity raffle purchases. If a donation includes something of monetary value (such as a gift or dinner), only the amount above the fair market value of the item is deductible. Those hosting Foreign Exchange Students through a reputable organizing can deduct $50 a month for hosting a student and costs included in volunteering (such as miles driven and supplies) ARE deductible. Child and pet care costs incurred during volunteering are NOT deductible, however.
There are limits as to how much of your donation is deductible. Donations to public charities and private operating foundations cannot exceed 60% of your AGI for cash donations, 50% of your AGI for ordinary income property, and 30% of your AGI for long-term capital gain property. Donations to private nonoperating foundations cannot exceed 30% of your AGI for cash and ordinary income property donations and 20% for long-term capital gain property. Luckily, charitable donation amounts not eligible for a deduction in the current year can be carried forward for five years. As always, please consult with a tax professional before making any major donations to verify it is eligible for a tax donation.
Harvesting Tax Losses
Were you able to sell a lot of investments at a profit in 2024? Awesome! However, you might not feel quite as elated when you file your 2024 taxes. To get ahead of your tax bill, you might want to start harvesting your tax losses to postpone some of the tax on these gains. The basics of tax harvesting is to sell investments that have depreciated in value at a loss to offset the gains of other stocks. These can be stocks, bonds, cryptocurrencies, or any other tradable security. The thought behind this is you can use your tax savings to reinvest and grow your portfolio. If your capital losses exceed your gains, you can deduct up to $3,000 ($1,500 if filing Married Filing Separately) against your other income. Additional losses can be carried forward indefinitely. Please consult with an investment professional before making any major decisions.
Maximizing Deferred Retirement Account Contributions
One way you can defer your salary income is by maximizing your deferred retirement contributions for your 401k, 403(b), SIMPLE plans, or SARSEP. By contributing pre-tax income to these plans, you delay paying taxes on the income until it is distributed through your retirement plan. The maximum amount an individual can contribute to a qualified retirement plan is $23,000 for 2024. For those over the age of 50, an additional $7,500 can be contributed. Please keep in mind that the limit is for all plans combined, not per plan. Contributions also cannot exceed your compensation from your employer in that tax year. For example: you have two jobs in 2024 with a Retirement Plan associated with each. For Job A. you only earned $12,000. You maybe only contribute up to $12,000 to the plan associated with that job even if you earn $100,000 from Job B. Contributions over your limit could be subject to double taxation (now and when distributed). You have until April 15, 2025, to make a deferred retirement account contribution for 2024.
Making Qualified Charitable Distributions for RMDs
If you are 70 ½ or older and have a Required Minimal Distribution (RMD) on an IRA, you can reduce your tax liability by donating your RMD to charity as a Qualified Charitable Distribution (QCD). In 2024, this limit is $105,000 ($210,000 if married and both spouses make a $105,000 donation from their individual plans). Donations must be made directly through your IRA trustee to a qualified charity before the end of the year. Making a qualified charitable distribution from your retirement account makes the distribution tax free. The distribution should be shown on your 1099-R and marked as a QCD. QCDs are reported on line 4 of your 1040 instead of the Schedule A like with other charitable contributions. If only part of the distribution is a QCD, then that QDC is reported on line 4a of your 1040 and the rest of the distribution on 4b. If the entire distribution is a QCD, then a "0" can be entered on line 4b. Although the contribution is not reported with other Charitable contributions, a receipt from the qualified charity must be obtained. Please speak with a tax professional if you have any questions.
Leveraging your HSA Contributions
If you have a High Deductible Health Plan, then you might also have a Heath Savings Account, or HSA. HSAs are savings accounts you can use for unforeseen medical expenses not covered by insurance. The maximum amount you can contribute to your HSA is $4,150 for an individual account or $8,300 for a family account. Those over 55 can contribute an extra $1,000. The advantage of an HSA is that there isn't any tax levied on the contributions, distributions for medical purposes, or earnings. If you contribute more than the maximum amount, then you will be subject to a 6% tax. If you withdraw from your HSA for non-qualified medical purposes, you will ensure a 20% penalty and the distribution becomes taxable. The 20% penalty is waived for those over the age of 65 withdrawing for non-medical purposes.
Unlike a retirement plan, there are no required minimal distribution amounts. This means you can continue to contribute and allow the account to grow until you need it. You can also move your HSA from job to job and change providers as needed. It is also easy to withdraw from these accounts, sometimes with a debit card provided by your HSA provider.
While a distribution must be made for qualified medical purposes, the medical expense does not need to incur in the current year. For example, you pay out of pocket and don't make any distributions from your Health Savings account in 2024 and save all your medical receipts in a folder. In 2029, you decide to make a distribution to reimburse yourself for those expenses incurred five years earlier. Since you already paid those medical expense out of pocket, you can use your reimbursements make a charitable contribution for additional tax savings.
Funding Education Savings Plans
When a child in born, one of the first questions his or her parents ask themselves is "how are we going to pay for college?" With college costs rising every year, this is a valid question, especially if you do not want your future college student to be saddled down with massive student loan debt following graduation. State-sponsored 529 college savings plan can be an excellent option to save for college. Since these are state sponsored, there are no federal deductions for contributions, but some states offer deductions. The earnings in a 529 plan are not taxable, nor is the distribution if it is used for educational purposes. Other benefits include that the plan you choose does not need to be in the state you reside, and it can be transferred to another child if the beneficiary decides not to attend college. Some states also offer prepaid tuition plans that allows parents to pre-pay tuition costs at the current rate as well as allow to be used for K-12 Private School.
Like with retirement plans and Health Savings Accounts, there are yearly contribution limitations. 529 plans also disallow contributions ones the account grows to a specific amount. Another downside to 529 plans is that contributions are treated as gifts. This means anyone contributing to the account is subject to the gift tax contribution restriction each year. If distributions are used for non-educational purposes, there is a 10% penalty, and the distributions becomes taxable. Individual states might have additional penalties as well.
Starting in 2024, 529 that have been opened for at least 15 years can be rolled over into Roth IRAs. There are some caveats with this new ruling. First, the amount you roll over must have been contributed within the last 5 years. The $7,000 (for 2024) IRA contribution still applies and there is a lifetime limit of $35,000. This means if you have already contributed $7,000 to your IRA in 2024, you won't be eligible to roll over anything from your 529 plan this year. The beneficially also must have had income greater than or equal to the amount being rolled over in the contributing year.