Not to sound like a Scrooge, but is donating to charity really a good year-end tax strategy?
It can be. Because of the worldwide pandemic and related restrictions, your donations are needed more than ever. And, with charitable tax deductions, your generosity will be rewarded. For the 2021 tax year, you can deduct cash donations of up to 100% of their adjusted gross income. Before 2020 and after 2021, the cutoff is 60% of AGI.
Donations to donor-advised funds (DAF) aren’t eligible for the higher limits.However, putting money, stocks, or personal property in a DAF allows you to deduct the entire contribution in the year you make it and decide later how you want to dole out grants to charities of your choice. Contributing one lump sum this year may help lift your deductions above the standard deduction amount and allow you to itemize
I’m concerned about capital gains. Is there any way of offset that income, or mitigate the taxable portion?
The good news is that the tax code allows you to sell investments that have fallen below your purchase price and use the resulting loss to offset capital gains in taxable accounts. Here’s the caveat: Investments you’ve held for a year or less are taxed as ordinary income, but investments you’ve held longer are taxed at the long-term capital gains rate, which ranges from 0% to 23.8% (including the 3.8% surtax on net investment income).
After matching losses against gains in the short- and long-term, any excess losses can offset the opposite kind of gain. If you still wind up with an overall net capital loss, you can use up to $3,000 of that loss to offset ordinary income and roll the rest over to the following year. Note that once you sell an asset at a loss, you must wait 30 days before reinvesting in it or buying a substantially identical investment.
I dabbled in cryptocurrencies this year. Should I be concerned about tax implications?
Well, if you keep your digital currency as just that, you won’t pay any penalties. It’s only when you choose to convert into actual currency that Uncle Sam weighs in.
Cryptocurrency is considered property for federal income tax purposes, meaning the IRS treats it as a capital asset. This means you pay the same as the taxes you might owe when realizing a gain or loss on the sale or exchange of a capital asset. Here’s what you need to know.
Calculating Taxes: When you buy and sell cryptocurrency, comparing your net proceeds to your cost basis isn’t the only step in figuring how much you owe in crypto taxes. You also need to consider the length of time you held the asset, as this determines the type of capital gain or loss you recognize.
Short-Term Capital Gains and Losses: When you buy and sell an asset within a 365-day period, you recognize either a short-term capital gain if it sold for more than what you paid for it, or a short-term capital loss if it sold for less. Short-term gains and losses are subject to the same tax rates you pay on ordinary income, such as wages, salaries, commissions, etc. The IRS has seven tax brackets for ordinary income ranging from 10% to 37% in 2021.
Long-Term Capital Gains and Losses: If you buy an asset and sell it after one year, the resulting difference between your net sales proceeds and your cost basis is a long-term capital gain or loss. Typically, you’ll pay less tax on a long-term gain than on a short-term gain because the rates are generally lower. Currently, there are three tax rates for long-term capital gains – 0%, 15%, and 20%. The rate you pay depends on your income
