Charitable organizations provide benefits to society and individuals in need of their services.
Charitable giving can also generate personal benefits to the donor. With the right guidance, development and planning, charitable giving can serve as a tax-savings tool in your financial plan while supporting the causes that are meaningful to you.
Helping to Achieve Your Goals
Charitable giving can play a crucial role in achieving your wealth management goals. By giving money to charities, donors are given the opportunity to align their personal values and interests with their financial goals. It can facilitate the transfer of wealth and provide valuable tax benefits for donors and their heirs.
Charitable giving not only creates income tax benefits for individuals, but can also provide substantial estate tax benefits. The individual income tax charitable deduction is subject to adjusted gross income limitations, whereas the estate tax charitable deduction is not subject to such limitations.
Determining which charitable structure is right for you will depend on what your charitable goals are, and if they will be manageable in the long term.
There are numerous vehicles that are commonly used that can help you take full advantage of tax deductions.
A public charity is a nonprofit organization that receives public support, actively functions to support another charity or is devoted to testing for public safety.
Donations to public charities are fully tax deductible to the extent of the law. Excess contributions over and above the tax law limitations are carried forward and are deductible for up to five years following the year of the gift.
Donor Advised Funds (DAFs)
DAFs allow donors to make charitable contributions at a specific date in time, receive an immediate tax benefit and then give recommendations as to which nonprofits will receive distributions.
Donors may take a tax deduction in the year of their
contribution and have the ability to give funds to various charities over a
number of years. This allows donors to get an upfront tax deduction for the fair market
value of the cash or securities gifted and avoid paying federal and state
income taxes upon the sale of the securities.
Example: Suppose you have a portfolio of appreciated securities and have considered charitable giving; however, you are unsure of the appropriate time to give. If you are in a higher tax bracket or have a year with a large amount of income (through a bonus, business sale, options exercise, etc.), a DAF will present an opportunity for you to reduce your current year tax liability by making charitable contributions to offset income.
You will receive an immediate tax benefit for the donation of appreciated securities and avoid paying any capital gains tax on the sale of those securities, reducing your potential income tax burden. From this point on, you can advise the DAF on which charities the contributions will be distributed to.
Generally set up in large metropolitan areas, community foundations serve with the goal of enhancing the lives of people within a geographic area. Community foundations are typically recognized as public charities in part because they receive support from the general public.
A private foundation is a nonprofit organization that is typically established via a single primary donation from an individual or a business and whose funds and programs are managed by its own trustees or directors. Many private foundations do not accept donations and instead invest their principal funding, then distribute the income from investments for charitable purposes.
A supporting organization carries out its exempt purposes by supporting a named public charity. This type of charity is treated as a public charity for income tax purposes.
A gift annuity involves a contract between a donor and charity, whereby the donor transfers cash or property to a charity in exchange for a partial deduction and a lifetime stream of annual income from the charity.
Deferred gifts are similar to a charitable
gift annuity with the exception that you choose to wait for the first annuity payment, rather than having payments begin immediately. This can give donors the opportunity and flexibility to meet their wealth management goals.
Charitable Remainder Trust (CRT)
A CRT typically sells stock and reinvests the proceeds in a diversified portfolio. The donor transfers highly appreciated assets into a CRT and in the event that the donor passes or the fixed term ends, the assets in the CRT are transferred to a charity.
The CRT will not recognize gains and instead will defer the gain and spread it out over annual payments. This provides the donor a current year charitable deduction for the discounted value of the assets transferred to a charity in the future, while reducing the donor’s taxable estate.
Charitable Giving from an Individual Retirement Account (IRA)
You are allowed to make a tax-free donation of up to $100,000 of your required minimum distribution to a qualified charity. Instead of taking your required distribution, you can have it directly sent to the qualified charity of your choice. This will lower your adjusted gross income and allow you to avoid reporting the income and paying taxes on the distribution.
As an estate planning tool, thought should be given to naming a charity as the beneficiary of an IRA or other retirement account.
As the beneficiary of an IRA or retirement account, charities do not pay tax on distributions, whereas an individual beneficiary will pay tax at ordinary rates. An estate can also take a charitable deduction on the amount of the IRA or retirement account donated to a qualified charity.
Charitable giving may not be an option for everyone. For many, philanthropy is about personal values and not just the fact that it may create a tax deduction. You have to decide if it is important to you, and if it is, the next step is planning. Many of the options previously described involve extensive planning.
In light of the recent election, it has been speculated that there could be a cap on itemized deductions. While nothing official, President Trump has informally indicated that he plans on adopting the House’s proposal to eliminate all deductions except for mortgage interest and charitable contributions, as well as eliminate the estate tax. This possibility will be something to watch very closely in the coming months.
At tax time, the IRS requires substantiation for all of your charitable contributions. Donations over $250 require written acknowledgment from the charity and non-cash donations over $5,000, other than publicly traded securities, may require an appraisal.
Charitable deductions under $250 must be substantiated by receipts or canceled checks. In addition, charitable organizations are required to provide documentation for contributions in excess of $75 for which you received a benefit, such as event tickets or merchandise.
RubinBrown Advisors help clients identify, prioritize and achieve
their financial goals and objectives utilizing an experienced group of
professionals that can integrate income taxes, estate taxes, financial
planning, risk management and investment management needs, all in one
place, throughout their lifetimes.
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