With the holiday season now in full swing, many of us are thinking about what we can do to help the less fortunate.
Charitable giving feels good to do and can make a big difference to organizations that rely on donor contributions for a large portion of their operating budgets. Around this time of year, there tends to be an increase in “checkbook giving” — writing a small check to a charity, sometimes in response to a mail solicitation. It’s quick to do and requires very little effort.
As we’re planning our donations, though, it’s good to keep in mind how a well-considered financial strategy can make these charitable dollars go further, as well as provide some benefits back to the donor in the form of tax breaks. Many of our clients at Argent are charitably inclined. Whenever we know someone has an interest in giving, whether it is to a religious organization, educational institution, health and human services or other nonprofit, we have conversations about tax-advantageous ways to help those donations have the greatest effect.
Here are a few of the most popular options available:
Donating stock or other property: By donating stock that has increased significantly in value since it was purchased, you can receive important tax benefits. The primary one is avoiding a tax of up to 23.8 percent that you’d normally pay if you sold the stock (the 20 percent capital gains tax, plus the Affordable Care Act tax of 3.8 percent). A charity, on the other hand, could receive the stock as a gift from you, sell it and pay zero capital gains tax. This benefit also applies to other types of assets as well.
IRA distributions: We have a number of clients with individual retirement accounts (IRAs) who are age 70½ or older and must take minimum required distributions from their accounts. Distributions are normally taxed at the IRA owner’s ordinary income bracket — which could be as high as 37 percent, meaning the person may only receive 63 percent of their money after taxes. By giving some or all of your IRA distribution to charity (up to $100,000 per year), you can fulfill the yearly distribution requirement while making your dollars go further than they would if you received them directly.
Donor-advised funds and foundations: Donor-advised funds can be a smart way to receive the tax benefits of a charitable contribution even if you haven’t decided on a recipient for your money. The barrier to entry for opening a donor-advised fund is low — only $5,000 — and once you’ve made the contribution, it can be maintained for your lifetime. One important note: Once you contribute to a donor-advised fund, it’s technically no longer yours, so you can’t change your mind about donating. However, you can designate what charities receive distributions and the amount. Management fees for these funds are in the 1 percent range, which is very affordable.
Private foundations also allow donors to make a gift in the current tax year without selecting a specific charity as a recipient. Foundations are more complex to set up than donor-advised funds but are intended to last for multiple generations and allow donors a higher degree of structural flexibility. Foundations also differ from donor-advised funds because minimum distributions of 5 percent annually must be distributed to charitable beneficiaries.
Charitable lead trusts/charitable remainder trusts: Charitable trusts can also be a way for clients to structure donations and receive income. With a charitable lead trust, a charity receives distributions from the trust for a finite time — 10 or 20 years, for instance — after which the beneficiaries receive any remaining assets. A charitable remainder trust works the opposite way — beneficiaries receive income from the trust for a lifetime or specific number of years, after which the principal is donated to charity.
Timing donations: With the 2017 tax reform, the timing of when you donate is even more important. Clients can often benefit from “bunching” or “bundling” their charitable gifts for a number of years into one taxable year. This strategy allows the donor to itemize deductions in the year of the “bundled” charitable gift (often done through a donor-advised fund) and use the standard deduction in those years that donations are not made. In total, the deductions can be maximized over multiple years.
Each donor’s personal financial picture and charitable goals will ultimately make the difference in which route they choose. The first step should be a conversation with a wealth advisor who can offer personalized recommendations before the donor meets with their CPA or attorney.