With Thanksgiving and the holiday season soon upon us, now is a great time to think about charitable giving. I have always felt that it is important to give back no matter how big or small. Sometimes that means donating your time, and if you can afford to give money to a cause you feel strongly about, those donations can make a big difference. Fortunately, my staff is also very charitably minded. My wife and I have also instilled this in our children at an early age. While I feel it’s important to practice gratitude year-round and help those in need whenever you can, this time of year always feels even more important.
Charitable giving should be an altruistic act, but in some situations, there may be a tax benefit to the giver. Now is a good time to start thinking about year-end tax planning. Waiting until the actual year-end can cause you to miss deadlines or make mistakes in your giving efforts. The biggest reason to gift, however, is because so many organizations and the individuals they help are in need. Charitable organizations need donations more than ever. Since every person has different needs and different desires when it comes to giving, here’s a list of several ways that you can give.
1. Qualified Charitable Distribution (QCD) - In my opinion, one of the best ways to give is to gift your IRA or your Required Minimum Distribution (RMD) from your IRA. You can gift up to $105,000 per year this way. Also, you must be age 70 ½, and you cannot gift funds from an employer-sponsored plan. It’s important to note that the transfer must go directly to the charity from the IRA, not to you first.
2. Life Insurance - You can gift a current or new policy. This option allows you to give more than you otherwise might. Gifting a policy you no longer need or want is a great option. The charity can keep and maintain the policy or possibly sell it. Many times it can be sold for much more than the cash value, and you may get a much larger deduction if they do. Consult your tax advisor first.
3. Charitable Lead Trust (CLT) - With a charitable lead trust, the charity gets all the income from the trust, and upon death, your beneficiaries get the trust assets.
4. Charitable Remainder Trust (CRT) - This is the opposite of a CLT. You get the income, and the charity receives the assets upon death. This may be good for people who need the income and deductions to possibly reduce taxes but have no heirs.
5. Charitable Gift Annuity - This gives you a guaranteed income for life via an annuity, and a portion of it goes to the charity. The balance goes only to that charity, unlike a CRT, etc., which can fund multiple charities.
6. Real Estate/Collectibles - You gift the property (usually highly appreciated), then the charity sells it. Caution: not all charities have the resources to handle these transactions, so discuss it with them first. Regarding collectibles, they must be highly marketable.
7. Appreciated Stock - You gift your stock to a charity, and they can sell it tax-free. You get a deduction without paying the taxes due if you were to sell it yourself. This can be a great way to avoid paying taxes on highly appreciated tech stocks, etc., that have seen a large run-up in values in recent years.
8. Donor-Advised Funds - The fund is managed by the organization, but you direct which investments within the fund you want. They do all the work (for a fee!) Your deduction is limited to 60% of your adjusted gross income (AGI) for cash donations and 30% for donated securities.
9. Pooled Income Fund - This is similar to a DAF, but you have no investment control. There is a limited deduction based on your life expectancy and the fund’s performance.
10. Private Foundation - You are the DAF. The deduction is limited to 30% of your AGI for cash donations and 20% for securities. This is designed for ongoing family giving.
You should consult with your tax advisor and financial advisor to discuss these gifting strategies.
Frequently Asked Questions About Year-End Charitable Giving
1. Why is year-end a good time to consider charitable giving?
Year-end is an excellent opportunity to support charitable organizations while reviewing your tax planning strategies. Planning ahead can help you avoid missed deadlines and mistakes, while ensuring your contributions reach the organizations and causes that matter most to you.
2. Can donating appreciated stocks provide tax advantages?
Yes. Donating appreciated stock directly to a charity may allow you to claim a charitable deduction without having to sell the stock yourself and recognize the associated capital gains. This can be particularly beneficial for investments that have increased significantly in value. Consult your tax advisor to determine how this strategy may apply to your situation.
3. What other assets can I donate besides cash?
There are several ways to give beyond cash donations. Options discussed in the article include life insurance policies, real estate, collectibles, and appreciated securities. Charitable lead trusts, charitable remainder trusts, and charitable gift annuities can also help individuals incorporate philanthropy into their financial plans. Because these strategies have different financial, tax, and estate-planning implications, it is important to consult your financial advisor and tax advisor before making a decision.