Individual Tax

If your contributions to charity begin and end with check writing, you may be missing out on some satisfying volunteer opportunities — and a few tax deductions. IRS rules allow you a number of tax breaks for contributions other than cash that you make to qualified organizations.

Getting There and Back

You may deduct the costs of going to and from a location where you volunteer your services. You may also deduct the costs of driving for the organization — for example, to pick up or deliver items. To compute your deduction for charitable driving, use the standard mileage rate of 14 cents per mile for 2020, per the IRS, or deduct the actual cost of your gas and oil. Either way, parking fees and tolls are also deductible.

Recoup Your Expenses

Out-of-pocket expenses you pay in giving services to a qualified organization may count as a charitable donation if you’re not reimbursed for them. You cannot deduct your personal expenses, such as child care costs, even if they are necessary for you to volunteer. You may, however, deduct the costs of buying and cleaning a uniform you’re required to wear while volunteering if it is not suitable for everyday use.

No Time to Volunteer?

Many charities accept noncash donations. Giving investments that have increased in value can be a smart tax move. Instead of selling the investment and paying capital gains tax, donate it to a qualified organization. If you held the investment for more than one year, you generally can deduct its fair market value at the time of the donation. Remember that you’ll need a receipt from the organization to claim a tax deduction, and other records also may be required.

Some Restrictions

Contributions must be made to qualified organizations that meet IRS guidelines. Not sure? The IRS has an online tool, the Exempt Organizations Select Check, that can help. Or call IRS Tax Exempt and Government Entities Customer Account Services at 1-877-829-5500.

Things you can’t deduct include contributions to a specific individual; the value of your time or services; personal expenses incurred while volunteering, such as the cost of meals (unless you must be away from home overnight); and appraisal fees to determine the value of donated property.

Consult your tax advisor for more information on charitable donations.

Like most people, you may have very clear ideas about the legacy you intend to leave to your loved ones. And your plans may include dividing your financial assets equally among your children, which seems to be the fairest approach. If you have four children, for example, you could leave each one of them a quarter share of your assets.

However, this approach, while seemingly equitable, may not deliver the results you hope for. The issue lies with the taxes that your beneficiaries pay. If, as is likely, your children have different marginal income tax rates, they could inherit unequal amounts after paying taxes. Furthermore, more taxes may end up being paid than necessary.

Taxes and Investment Accounts

If your financial assets consist largely of investment accounts, you know that different types of accounts, tax-deferred and taxable, have different tax implications for beneficiaries. For example, the income taxes you deferred while contributing to a tax-deferred account, such as a traditional individual retirement account (IRA), must ultimately be paid to the IRS. (State taxes may also be due.) You will pay these taxes when you make withdrawals from your IRA or those who inherit it will have to pay taxes. Essentially, your beneficiaries will inherit the income tax liability of your IRA.

The opposite occurs with a taxable investment account. With a taxable account, you pay taxes annually on any realized net capital gains, dividends, and interest earned by the account investments. When you die, your beneficiaries get the full value of the account since there is no embedded income tax liability. (For income tax purposes, the cost basis of appreciated assets is “stepped-up” to their fair market value at the time of death.)

Maximizing the Total Inheritance

As noted already, when beneficiaries have different marginal tax rates, the sum each ultimately receives is determined in part by the types of assets that are inherited. For example, let’s say your estate plan states that each of your four children will receive $750,000 from your IRA, worth $3 million. If the children are in the 35%, 24%, 22%, and 12% tax brackets, each child would receive a significantly different after-tax amount.

Instead of leaving your four children an equal distribution, you and your tax advisor may be able to craft a strategy that would give each beneficiary a different initial amount but nearly equal amounts after taxes are considered. Depending on the composition of your assets and your children’s tax situations, this type of tax planning could also result in a lower overall tax liability.

Distributing assets unequally like this is a complex approach. Alternatively, if you have a traditional IRA, you might consider converting all or part of it to a Roth IRA. When you convert a traditional IRA to a Roth IRA during your lifetime, you incur the income taxes on your retirement savings at the point of conversion. That means that your savings can be passed on to your beneficiaries with no income tax liability. Moreover, the assets in the Roth IRA can potentially grow and be distributed free of income taxes. Again, this strategy can be potentially favorable if your beneficiaries are in different tax brackets.

When it comes to estate and tax planning strategies, we recommend that you work closely with your tax and legal advisors before taking any steps.