Published on Tuesday, May 23, 2017
Written By Brian Cochran, CFP®, CKA® Financial Planner
Part 1 in a 3 Part Series
The dust has settled after another tax season. This time every year, I hear from frustrated clients who, upon reviewing their tax returns, ask, “How can I pay less taxes next year?” In the weeks ahead, I will provide insight across three themes that could help you lower your taxes for 2017 and beyond.
- Charitable Giving
- Tax-advantaged Savings
- Special Deductions and Credits
Before we explore strategies to limit taxes, let’s put taxes in the appropriate spiritual context. At John Moore Associates we believe taxes are indicative of God’s provision. I understand why you may not feel like praising God after writing a big check to the US Treasury, however taxes come with prosperity. Almost half of US households have so little income that they pay no federal taxes.
With that context in mind, we have tax laws in place that incentivize certain behaviors through tax credits and deductions. Taking advantage of honest and legal strategies to mitigate taxes is not sinful. It’s smart.
The charitable deduction is one of the most common methods for reducing taxes. In 2011, 75% of households with a household income of $100,000-$200,000 reported a charitable contribution on their tax returns, and 92% of households with a household income of $500,000-$1,000,000 made a tax-deductible gift or donation*. For many families, giving is sporadic at best. But at John Moore Associates, we encourage you to take full advantage of the tax benefits of charitable deduction by developing a more consistent and intentional giving strategy.
- Make A Plan. Develop a giving plan early in the year. Research shows that families give as much as 30% more if they have a giving plan in place. Start with the percentage of income you would like to give. If you are not sure how much to give, I recommend 10% of your gross income plus 1% of your assets. You can pre-determine the recipient of most of your gifts and set up automatic contributions from your bank account, but leave some flexibility so you can respond to God’s prompting throughout the year.
Once you have this year’s giving planned, consider a strategy for increasing your giving each year. You may not have the capacity to give 10% this year, but it may be possible to at 5% and increase your giving over time.
- Give Growing Assets. As you develop a giving plan, consider assets as a resource, not just income. Many families have never considered sharing from their net worth, but it is a powerful concept that opens a whole new capacity to give. Specifically, consider a gift of appreciated investments. By giving an investment that has appreciated, you receive a deduction for the full value of the gifted asset, without paying the capital gains taxes on the appreciated amount. A qualified financial advisor can look at your investments and help you determine which investments are the most compatible with your giving plan.
- Give In Retirement. If you are over the age of 70 ½, you may have an additional opportunity to give assets. You likely have a Required Minimum Distribution (RMD) that you must take from your retirement accounts. In 2015, Congress voted to allow a distribution of up to $100,000 directly from your retirement account to a qualified charity. The distribution to charity counts toward the annual RMD and could result in significant tax benefits. You do not have to itemize your deductions to receive financial benefit from giving your RMD to charity.
The John Moore Associates team has extensive experience in gifting assets. It would be our joy to assist you in planning and executing your own asset-based gift. And although it is ultimately our clients’ decision how much they give, our guidance in maximizing the benefits of their gifts has led to over $15 Million in charitable giving in the past five years.
*Source: Congressional Research Service analysis of the IRS’s Statistics of Income 2011 Data.
The information herein has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Brian Cochran and not necessarily those of RJFS or Raymond James. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Raymond James financial advisors, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.