For those of us who are charitably inclined, donating is an annual endeavor. Along with benefiting the causes we care about, giving usually brings a side benefit: tax deductions. Choosing how and when to make these donations is an important part of tax planning.
Here are five key strategies to help you maximize the benefits of your charitable gifts, both for yourself and your charity.
1. GIVE APPRECIATED ASSETS TO AVOID CAPITAL GAINS TAX.
If you have securities or other assets which you’ve owned for more than a year and that have increased in value, consider gifting them to charity. You’ll avoid the capital gains you would incur if you sold the assets. It’s also possible to receive an income tax deduction for the full fair market value, even if your cost basis is much lower.
For example, let’s say you invested $20,000 in a stock that is now worth $100,000. If you were to sell the stock, you could pay as much as $19,040 in federal capital gains tax. If you then donate the proceeds to charity, the charity would receive $80,960. You could potentially deduct up to that same amount on your tax return.
What if you donated the stock directly to charity instead? In this case, the charity would receive the full $100,000, since charities are allowed to sell the stock tax-free. You would also receive a potential income tax deduction of up to $100,000. The total benefit to you and the charity would be significantly greater.
2. TIME YOUR GIFTS BASED ON YOUR INCOME.
If you received an influx of income this year, such as a large bonus or proceeds from the sale of a business, then consider making a larger donation before the end of the year to offset that income. If you donate to a public charity, you’ll be able to deduct up to 60 percent of your adjusted gross income (AGI) if the donation is in cash and 30 percent if you donate securities or other assets. (If you give to a private charity, the deduction limits are lower.) Even if you exceed the AGI limit, then you can carry over contributions and deduct the excess in each of the next five years.
If you’re in a year-end time crunch for making your donation but are uncertain about which charity to choose, we often recommend using a donor advised fund (DAF). A donor advised fund is a particularly attractive option to consider in a year when you have realized a large amount of capital gains or have significant additional income. You’ll get an immediate tax deduction for your donation and may wait to select a specific charitable organization any time in the future while assets grow in the fund.
3. IF YOU ARE 70½ OR OLDER, GIFT IRA ASSETS.
Donating your IRA assets to charity may be a good idea due to their taxable nature. If you are 70.5 years or older, you may transfer up to $100,000 per year directly to a charity, tax-free. You won’t get an income tax deduction for the gift, but the amount will not be included in your gross income. The other major benefit: charitable distributions count toward the required minimum distributions that you must make each year once you turn 73.
4. NAME A CHARITY AS THE BENEFICIARY OF YOUR RETIREMENT ACCOUNT.
If you plan to leave money to charity as part of your estate after your death, it is almost always better for your heirs if you use your retirement assets to fulfill the gifts before gifting your non-retirement assets. Unlike non-retirement assets, your heirs must pay income tax when they pull money out of a traditional IRA or 401(k) plan they have inherited. And, if your estate exceeds the estate tax exemption amount ($12.92 million or $25.84 million for a couple in 2023), these assets may only reach your beneficiaries after being subject to estate tax at 40 percent. Ultimately, your beneficiaries may receive less than 50 cents on the dollar, depending on their tax brackets and your estate tax situation. A charity, in contrast, is not subject to estate or income tax and will receive 100 percent of the funds.
5. CONSIDER A CHARITABLE TRUST.
There are two basic types of charitable trusts: charitable remainder trusts (CRTs) and charitable lead trusts (CLTs). However, the interest rate environment can play a role in their potential tax advantages.
CRTs provide you or your beneficiaries with a stream of income over the life of the trust and turn over the remaining assets to a charity at the end of the trust’s term. How much of your contribution is tax-deductible depends on the present value of the remainder interest in the trust, which is determined by an IRS calculation.
CLTs work the opposite way, making annual contributions to a charity and distributing the remaining assets to beneficiaries at the end of the trust’s term. With a CLT, you receive a deduction based on the present value of the stream of distributions the CLT makes to charity. Generally, a CLT is a more favorable option when interest rates are low, since lower rates increase the present value of the charitable gift, thereby increasing your potential tax deduction. In addition, any appreciation of the trust assets above the IRS- calculated interest rate results in a tax-free gift to your beneficiaries
CHECK WITH CHARITIES
As you consider your gifting, it’s a good idea to consult with the charity on its gift acceptance policy to ensure they can receive the assets you want to contribute. While it is not a requirement, developing open communication often yields more personal satisfaction with a gift and more meaningful influence on the causes you care about.
Charles R. Johnson, Wealth Director, is responsible for developing investment and trust relationships with families and organizations. He works closely with the Trust and Tax planning group to help clients determine optimal asset allocation and transfer strategies. Before joining Fiduciary Trust, he worked for Rockefeller Capital Management, an independent financial services firm offering global family office, asset management, and strategic advisory services to ultra-high net worth families, institutions, and corporations. He received his Bachelor of Science degree in Business Administration from the University of Southern California. He works closely with the Addiction Education Society non-profit.
Charles R. Johnson
Wealth Director | 628 286 8403 email@example.com
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