Philanthropy & Charity

Before you make a sizable gift, be sure to seek tax advice from a professional that understands your personal situation.

Throughout history, Americans have given generously to charity. The purpose of this section is to provide an overview of how to incorporate charitable giving into your financial planning in order to maximize your philanthropic, tax, and legacy planning goals.

Important Elements of a Gifting Strategy #

  • Minimize Taxes. By donating to a charitable organization, you may minimize your taxes while also supporting causes that matter to you.
  • Timing of Gifts. During your lifetime or after you pass away, you can make a gift to a charity, such as a religious organization, educational institutions, or other qualified charitable organization.
  • Competing Needs. You should balance your income needs and the needs of your beneficiaries with the tax advantages of giving now, as well as enjoyment of the act of giving.
  • Tax Implications. Understanding the tax implications of your decisions is important before you decide how to give. Gifts made to charities, specifically, are exempt from gift tax. Giving as much as you want to charity during your lifetime and after you’re gone may help to reduce federal estate and gift taxes significantly.

Deduction Limitations #

In spite of the fact that charitable contributions are 100% deductible, there are limits on how much you can deduct in a given year based on your Adjusted Gross Income (AGI)

You’re eligible for itemized deductions for charitable contributions up to a certain percentage of your adjusted gross income for cash contributions.

  • Up to 60% of your adjusted gross income via charitable donations
  • May be limited to 20%, 30% or 50% depending on the type of contribution and the organization
  • You may be able to carry forward amounts that exceed the limit and deduct them over the next 5 years.

IRS Publication 526 – Charitable Contributions – This publication explains how individuals claim a deduction for charitable contributions. It discusses the types of organizations to which you can make deductible charitable contributions and the types of contributions you can deduct. It also discusses how much you can deduct, what records you must keep, and how to report charitable contributions.

Gifting Strategies #

1. Donating Appreciated Securities #

The most common way to donate to a charity is with cash. It is possible to give more to charity and potentially enjoy greater tax benefits if you consider alternative assets.

Publicly traded appreciated securities you have owned for more than a year:

  • Publicly traded securities (appreciated securities held over 1 year)
  • Complex, non-public traded appreciated assets (e.g. private company stock, real estate)

In general, you are entitled to the full fair market value (FMV) tax deduction on long-term appreciated assets when you donate them to charity. In addition, giving these assets directly may allow you to avoid capital gains taxes.

The combination of these tax savings may make it possible for you to donate more to charity than if you sold the asset and donated the cash proceeds.

2. Donations from your IRA’s RMDs #

If you are age 72 or older, IRS rules require you to take required minimum distributions (RMDs) each year from your tax-deferred retirement accounts.

  • A qualified charitable distribution (QCD) is a direct transfer of funds from your IRA, payable directly to a qualified charity.
  • Amounts distributed as a QCD can be counted toward satisfying your RMD for the year, up to $100,000.
  • The QCD is excluded from your taxable income.

Can you donate the IRA distribution to charity after taking the distribution?

This is not the case with a regular withdrawal from an IRA, even if you use the money to make a charitable contribution later on. If you take a withdrawal, the funds would be counted as taxable income even if you later offset that income with the charitable contribution deduction. There are deduction limits. This additional taxable income may push you into a higher tax bracket and may also reduce your eligibility for certain tax credits and deductions.

3. Utilize a Donor Advised Fund #

Donor-advised Funds are charitable giving programs, generally run by public charities or financial institutions. They allow you to give on a basis intended to maximize your income tax situation and help meet the needs of the causes that are meaningful to you.

  • Contribute cash, appreciated assets, or investments that have been held for more then a year without paying capital gains taxes.
  • Contribute to your account and grant to charity at any time, not just at year-end.
  • Keep track of your contributions and grants online, plus access a simple and personalized annual report at tax time.
  • Once you make an irrevocable contribution, you can give to charities immediately or you may invest your charitable assets for potential tax-free growth.

4. Private Foundation #

If you have the means and desire to play an active role in philanthropy, you might also consider establishing a private foundation.

  • Foundation managers retain control over the investment of their foundation assets, as well as which charities will receive grants from the foundation.
  • Foundation grants can be used to support individuals for hardship reasons and even scholarship programs.
  • Downside is a significant amount of administration.

5. Trusts #

5.a. Charitable lead trusts (CLD)

A CLD lets you to make payments to charities during your lifetime. The remainder of the assets go to you, your spouse, or other beneficiaries when you pass away, or at the end of a shorter term of your choosing.

5.b. Charitable remainder trusts (CRT)

Charitable Remainder Trusts allow you and/or another beneficiary to receive income payments throughout your lifetime, with the remaining funds going to charity at the end of the trust.

Other Planning Considerations #

It is always important to ensure your beneficiary designations are correct; if they are incorrect or missing, your assets may not be distributed as you intended or your charitable beneficiaries may have to wait to take ownership and incur probate costs.

In general, 401(k)s and other qualified retirement plans follow the same rules as IRAs. Your spouse may need to consent in writing if you wish to designate beneficiaries other than your spouse

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