Have you ever wanted to ask your financial advisor about the tax advantages of charitable contributions, only you’re afraid the question might “muddy the waters” around your motivation for giving? If so, you’re not alone. I’ve sat across from dozens of generous, kindhearted people who give for all the right reasons, yet they said they felt almost dirty asking about the tax benefits they’d receive.
There’s no need to feel ashamed. There’s a reason the nation’s tax laws include charitable deductions. Lawmakers know the benefits of private-sector philanthropy, so they designed the laws to incentivize those who are able to give. Giving without concern for deductions might appear selfless, but with the right advice and proper planning, this doesn’t have to be an either/or proposition.
Here I’ll discuss three big buckets you can use to not only maximize the impact of your gift, but also maximize the deduction you receive — no guilt or shame involved.
1. Outright Gifts
Cash is the simplest form of charitable giving. You and your spouse can both give up to $15,000 per year to a loved one without any gift tax consequences.
Another way to give an outright gift is to donate personal property like artwork or collectibles to a charitable institution, museum or school. The deduction you receive is based on the item’s market value, and this option gives the organization flexibility, as it can keep or sell the item.
2. Gifts That Give Back To You
• Qualified charitable distributions (QCDs) are an option for those age 70½ and older. The recent passage of the SECURE Act pushed out the age when a retirement account owner must start taking required minimum distributions (RMDs) to age 72. Despite the delay in the starting age for RMDs, QCDs from individual retirement accounts, or IRAs, were not affected. If you are over 70½, you can avoid paying taxes on distributions from your IRA (up to $100,000 annually) if you send them straight to a 501(c)(3) charity.
• A charitable remainder trust or annuity trust offers another option for your giving. These pay out a percent of the trust’s assets to a beneficiary of your choice for a set number of years. The remainder then goes to the designated charity. On the flip side is a charitable lead trust, which first gives money to the charity. Either option offers the giver a tax benefit.
• Charitable gift annuities make fixed payments to individuals or organizations, and there are two types you need to know about. The first is an immediate payment gift annuity. As the name implies, it begins making payments when the gift is made. A deferred gift annuity begins at a later date of your choosing. There’s also an option to structure an annuity in such a way that it almost acts like a mutual fund, pulling together both your income and future donations to help beneficiaries based on the fund’s earnings. Each option can offer significant tax advantages.
• Donor-advised funds act as “charitable checkbooks.” You set up an account for the fund and then add cash, appreciated assets or business assets. You receive a deduction for the year in which an asset goes in, and you can donate from the fund as you wish. A couple of caveats with donor-advised funds: The beneficiary must be a 501(c)(3) charity, and putting assets into this type of fund is irrevocable.
• Securities are another option. You can donate a publicly traded security to a nonprofit organization if you’ve owned the security for over a year. You receive a tax deduction based on the market value of the security (with no capital gains tax). The nonprofit can sell the security for cash.
3. Gifts Payable Upon Your Death
• Upon execution of your will or living trust, a bequest provides a cash gift or percentage of your estate as a gift. Bequests cost you nothing during your life and are easy to make, whether you’re setting up a new will or would like to include one in your existing will.
• With life insurance, you can select a charity as the beneficiary of your policy. Depending on the size of your policy, you could make a large gift and reduce the estate tax burden on your heirs.
• Real estate allows you to gift a large asset — which can be sold — while reducing estate taxes.
• Finally, consider your retirement plans. You can designate a nonprofit as a beneficiary for all or a portion of your 401(k) plan, IRA or pension, which can help reduce the tax burden on your heirs.
Proper Planning Makes Your Giving More Impactful
Financial planning is not all about getting more money. It’s about getting the most from your money. Helping others through giving is such a rewarding part of that.
Wanting to know about the deductions and tax benefits you’ll receive as part of that giving does not make you selfish; it makes you wise. As you can see, proper planning doesn’t just benefit you during your lifetime. It can reduce the tax burden on your heirs after you pass.
With proper planning, you’re also empowered to choose the best strategy for your giving, ensuring the causes or individuals you want to help feel the full impact of your gift.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.