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5 Year-End Charitable Giving Strategies for Tax-Conscious Tech Professionals

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Year-end can be a pivotal time for reflection, self-assessment, and setting goals for the new year. Yet, it’s also a time for action—especially for tax-conscious tech professionals.

As your income level rises, proactive tax planning becomes increasingly important to minimize what you owe on Tax Day. For high earners with philanthropic intentions, the end of the year provides a final opportunity to offset this year’s taxable income with charitable deductions.

In this blog article, we’ll explore five strategies that can help you align your charitable giving objectives with your broader financial goals. By taking advantage of these opportunities, you can maximize your impact while reaping the associated tax benefits.

Consider these five year-end charitable giving strategies to lower your taxable income:

#1: Contribute to a Donor-Advised Fund (DAF)

With a donor-advised fund (DAF), you make a charitable contribution to the account, receive an immediate tax deduction (subject to IRS limitations), and then recommend grants over time to the charities of your choice. For high-earning tech professionals, a DAF provides a convenient way to make a lasting impact with your donations while maximizing this year’s tax deduction.

For example, suppose you contribute $50,000 to a DAF before the end of the year. You’d receive a tax deduction for the full amount in the same year (up to 60% of your adjusted gross income if you donate cash), reducing your taxable income by the contribution amount.

However, one of the advantages of a DAF is that you don’t need to decide which charities to support right away. Instead, you can spread your charitable gifts over several years, giving yourself time to research and select worthy recipients.

In the meantime, you may also be able to invest the funds you contribute, so that they can grow tax-free within the DAF until you’re ready to recommend a grant. This allows you to increase the amount you ultimately give to charity.

#2: Harvest Capital Losses and Make a Cash Donation

Tax-loss harvesting involves selling investments that have decreased in value to realize a capital loss. You can then use this loss to offset any capital gains taxes you owe for the year.

Moreover, if the losses exceed gains, you can deduct up to $3,000 from your ordinary income annually, carrying over additional losses to future years. As a result, tax-loss harvesting can be a powerful strategy for lowering your taxable income in current and future years—especially when the market is down.  

To further reduce this year’s tax bill, you can then donate the cash you raise to charity. By taking advantage of this additional deduction, you can minimize your tax burden while also making a positive impact through charitable giving.

However, be sure to avoid a “wash sale,” which can disqualify the potential tax benefits. This involves selling a security at a loss and buying the same security back within 30 days of the sale.

#3: Donate Shares of Appreciated Stock

If you hold shares of appreciated stock, donating these shares to charity offers a range of financial benefits. It can also increase the amount you’re able to give, thereby maximizing your impact. 

When you hold stocks in a taxable account, any increase in value above your original cost basis is subject to capital gains taxes. These taxes can significantly reduce your profits when you decide to sell.

However, by donating shares of appreciated stock that you’ve held for at least a year, you avoid paying long-term capital gains taxes on the amount you donate. You can also claim a tax deduction for the full market value of the stock at the time of donation, offsetting your taxable income. 

At the same time, the charity receives a larger donation than it might if you first sold your shares, paid the capital gains taxes, and donated the after-tax proceeds. Thus, donating shares of appreciated stock can be a valuable tax planning strategy, particularly for tech professionals who have accumulated large positions of company stock.

#4: Manage the Alternative Minimum Tax (AMT) by Strategically Timing Charitable Contributions

The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that high-income earners pay a minimum amount of tax, regardless of deductions and credits that would otherwise lower their tax bill. Tech professionals with complex compensation packages need to be particularly vigilant about AMT, as it can significantly affect their financial planning.

Unlike many other deductions, charitable deductions are allowed under AMT. Therefore, you may want to consider timing your contributions to align with years when you’re subject to AMT to reduce your taxable income and the corresponding AMT liability.

On the other hand, the charitable deduction may not be as valuable as it could be under the traditional tax code. Thus, if you expect to avoid AMT in future years, it may be wise to defer charitable giving and instead use the deduction to reduce your regular tax liability.

By strategically timing your charitable giving, you can navigate the complexities of AMT and minimize your potential tax obligation while still supporting causes close to your heart. Be sure to consult a financial planner like Simplicity Wealth Management or a dedicated tax expert to ensure you’re optimizing your approach.

#5: Offset the Tax Costs of a Roth Conversion with a Charitable Donation

The IRS allows individuals to convert a traditional IRA to a Roth IRA via a Roth conversion. This can be a powerful tax planning opportunity for those who expect to be in a higher tax bracket down the road.  

With a Roth conversion, you avoid paying taxes on future withdrawals from the Roth IRA. Furthermore, since Roth IRAs don’t have required minimum distributions (RMDs), you may have more control over your taxable income in retirement.

The downside is that a Roth conversion shifts your tax liability to the present. However, charitable giving can be an effective way to offset the potential tax consequences.

By making a charitable donation in the same year as the conversion, you can reduce your taxable income, diminishing the impact of the conversion on your overall tax liability. You also position yourself for tax-free growth and distributions in the future while achieving your charitable giving goals for the year.

Keep in mind Roth conversions can be complicated and may not be right for everyone. Be sure to consult with a financial professional before implementing this strategy.

Consider the Value of Strategic Planning and Expert Guidance

While this isn’t an exhaustive list of year-end charitable giving and tax planning opportunities, it provides a framework for understanding how to align your charitable intentions with your financial objectives. It’s also important to keep in mind that to reap the full benefits of your donations, you must itemize deductions on Schedule A (Form 1040) of your tax return.

As you navigate the complexities of equity compensation and tax planning, consider the value of professional advice. A financial planner who specializes in these areas can help you develop a comprehensive plan that supports your philanthropic and financial goals.

If you’re a tech professional looking to enhance your financial strategy and maximize your impact through charitable giving, Simplicity Wealth Management can help. To chat more in-depth about your individual situation, please schedule a call.

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