Many of our clients are charitably inclined but need help aligning their resources, priorities, and philosophy. Planning when and how to make charitable donations can be just as important as what you give as a well thought-out strategy can also have tax benefits.
Establish a Giving Plan
Develop a plan to help you make rational decisions about your giving and how to respond when solicited for support. Having a carefully designed strategy will help you use your charitable dollars effectively and ensure that you use your budget on charities that you really care about. Following a pre-determined plan will also help you Keep everything well organized which can be beneficial in a number of ways.
- Tracking your donations can eliminate the risk of giving to the same charities multiple times per year and forgetting about the tax deductible donations later.
- Understanding your budget and annual giving plan helps you know how to respond when solicited for donations, particular during the holiday season when there can be a surge in outreach.
- Retaining receipts from donations will make filing your tax returns easier and less stressful.
If you have identified what motivates you and what types of causes to support, the next step is doing proper due diligence on your charity options. Review the charity's mission, leadership, financial health, and results. You will also want to understand how your gift would be used. You will want to choose a nonprofit that uses its donations effectively and efficiently. You can research charities using websites such as Charity Navigator and GuideStar.
Also be aware that not all nonprofits qualify for charitable tax deductions. You can find information on tax deductibility for donations using the IRS Tax Exempt Organization Search.
Consider Donating Highly Appreciated Assets
Donating assets such as stocks can help you avoid capital gains taxes. The gift of a security that you have held for more than one year counts as a gift of the full market value on the date of the gift while also avoiding the recognition of capital gains. A charity can then sell the donated security and then use the proceeds. Giving appreciated assets to a loved ones in lower tax brackets would allow them to sell the security and potentially pay less tax on the sale. If you have an asset you are considering donating that has an unrealized loss, it is generally best to sell it yourself then give away the cash - you can't transfer the tax loss to another person.
The deduction of capital gain property is generally limited to 20% or 30% of your AGI, depending on the type of charitable beneficiary and the form of the gift.
You can give up to $15,000 in 2021 to as many individuals as you want without triggering potential gift tax consequences. If you are married, you and your spouse could each give $15,000 to an individual for a total of $30,000. The lifetime gift tax exemption is $11,700,000, which means you can give up to that amount over the course of your life without having to pay taxes on it. For example, if you gifted $25,000 to someone this year, $15,000 would not be taxable because of the annual exclusion. $10,000 of the gift would count against your lifetime limit. Because gifts exceeding the annual exclusion may require additional tax reporting, it is best to consult a professional when considering such a gift.
There are other ways to give more than $15,000 per year without triggering a gift tax. Gifts that go directly to educational or medical institutions to pay for an individual's tuition or health care bills are excluded from the gift-tax and do not count against your lifetime limit. You can also make a one-time contribution to a 529 plan for up to five time the annual gift tax exclusion ($75,000 for an individual or $150,000 as spouses in 2021). However, you would not be able to give additional gifts to that person during the five-year period without filing a gift tax return.
Instead of giving money, you can donate items to a charity. Your closet, garage, or attic may have things you no longer need or haven't used in years. Donating these items can allow you to make a gift without affecting your cash flow. Generally, non-cash gifts of more than $5,000 will require some additional tax reporting.
Long-term Giving Strategies
You may want your charitable giving plan to be more than a piece of your annual financial planning. You can designate charitable and personal gifts before you pass away and potentially reduce your estate tax bill.
One method is to designate a charity or person as a beneficiary of specific accounts such as your IRA. If you are interested in making a larger gift, there are trusts that can be set up to achieve your charitable donation goals.
If you want to make a substantial gift to a charity during your lifetime, but also want an income stream for yourself or another noncharitable beneficiary:
- If the charity you wish to benefit offers a charitable gift annuity (CGA), you can give cash, securities, and possibly other assets in exchange for a fixed stream of income from the charity for your lifetime. (Note the gift tax consequences if the noncharitable annuitant is not yourself).
- A charitable remainder annuity trust (CRAT) can make annual payments of a fixed amount of the trust’s assets to you or a noncharitable beneficiary for a term of years (not to exceed 20) or lifetime(s), with the remainder passing to the charitable beneficiaries.
- A charitable remainder unitrust (CRUT) can make annual payments of a fixed percentage of the trust’s assets, revalued each year, to you or a noncharitable beneficiary for a term of years (not to exceed 20) or lifetime(s), with the remainder passing to the charitable beneficiaries.
If you want to make a substantial gift to benefit a charity for a term of years, but ultimately retain the assets for yourself or your heirs:
- A charitable lead annuity trust (CLAT) can make payments of a fixed amount for a term of years, lifetime(s), or a combination thereof, with the remainder passing to noncharitable beneficiaries of your choice (e.g. your heirs).
- A charitable lead unitrust (CLUT)) can make payments of a fixed percentage of the trust’s assets, valued annually, for a term of
years, lifetime(s), or a combination thereof, with the remainder passing to noncharitable beneficiaries of your choice (e.g. your heirs).
Giving money to the causes and people you care about most can be an important and rewarding part of life. If you would like to discuss how a charitable giving strategy fits into your financial plan, contact an advisor today.