Too many people do their charitable giving backward. There’s a surge in interest in making contributions near the end of the year. That’s too bad. The benefits of charitable gifts often are maximized when you think about gifts early in the year and throughout the year. That way you maximize deductions and impact plus you can integrate charitable giving with the rest of your financial, retirement and estate plans.
Writing a check to charity is the easy way to give. But other giving strategies can generate multiple benefits.
Because the standard deduction was doubled in the 2017 tax law, a minority of taxpayers deduct itemized expenses on Schedule A, which means a minority of people receive tax benefits from their gifts, especially if they don’t plan early and often.
One strategy is to bunch several years of planned charitable contributions into one year. Then, your total itemized expenses can exceed the standard deduction, giving you an extra tax benefit from the contributions.
One bunching strategy is to donate a few years’ worth of charitable contributions in a lump sum to a donor-advised fund (DAF). You take a tax deduction the year the contribution is made but distribute the money to charities over time in any pattern you want. In the meantime, the contribution is invested tax free in the DAF.
A contribution to a DAF doesn’t have to be by cash or check. Many DAFs and charities will accept a wide range of assets. One of the best ways to make charitable contributions is to donate appreciated investments, such as stocks, mutual funds, real estate, cryptocurrencies, and more.
A donation of appreciated investment property gives you a tax deduction equal to the fair market value of the property on the date of the gift. No capital gains taxes are due on the appreciation that occurred while you owned the property. Donating an appreciated investment often generates more after-tax benefits than writing a check after separately selling the investment and paying taxes on the gain.
When you’re looking for guaranteed lifetime income in addition to sheltering gains from an investment and generating a tax deduction, there are two strategies to consider.
You can make a contribution to the charity in return for a charitable gift annuity. The annuity pays income to you for either life or a period of years, whichever you select. You’ll receive a lower income payment than you would from a commercial annuity, and the difference is a gift to the charity. The present value of the gift is deductible.
For example, a married couple ages 65 and one 66, make a $100,000 cash contribution to a charity in return for a charitable gift annuity. Lifetime payments are to begin immediately.
They will receive a charitable contribution deduction of $27,766 this year. Each year they’ll be paid $3,900, no matter how long they live. For 24.5 years, $2,948 of the payments will be tax free and only $951 will be taxed as ordinary income. After that, the entirety of each payment will be taxed as ordinary income. The details are subject to change each month as interest rates change.
If the couple fund the annuity with a donation of appreciated investment property instead of cash, their gain will be taxed as part of the annuity payments pro rata over their life expectancy.
Another gift that generates annual income is the charitable remainder trust.
Donate cash or appreciated property to the trust. The trust sells any property tax free and reinvests the proceeds. You receive annual income from the trust for either life or a period of years, whichever you decide. The payments can be either a fixed amount (known as a charitable remainder annuity trust) or a fixed percentage of the annual trust value (known as a charitable remainder unitrust).
After you pass away or the income period ends, the charity receives whatever is left in the trust, called the remainder interest.
In either case, you receive an immediate tax deduction equal to the present value of the charity’s estimated remainder interest. There’s no current tax on the gain you earned in the investment. Instead, part of each income payment will be taxed as a long-term capital gain for your life expectancy.
IRS regulations determine the tax deduction and set parameters on the annual income that can be paid.
Traditional IRAs are a good way for some taxpayers to make charitable gifts.
Anyone who is charitably inclined and older than age 70½ should consider making qualified charitable distributions (QCDs) from a traditional IRA.
In a QCD, a gift is made directly from the IRA to a charity. You receive no deduction, but the distribution isn’t included in your gross income. Plus, if you’re taking required minimum distributions (RMDs), the contribution counts toward your RMD for the year. So, you receive credit for taking the RMD without having it increase your gross income. Details about QCDs are here.
A paid-up permanent life insurance policy you no longer need can generate tax benefits if you give the policy to charity.
When you transfer a policy with a paid-up value to charity, you qualify for a charitable contribution deduction equal to the paid-up value. The charity will name itself the beneficiary. The life insurance benefits won’t be included in your estate and will benefit the charity.
When the life insurance isn’t fully paid up, you can transfer ownership to the charity. You make contributions to the charity to pay the premiums. You qualify for a charitable contribution deduction for the premium payments.
There are a number of ways to make charitable gifts that generate tax deductions and potentially other benefits. Begin planning early in the year, and you’ll not only benefit charity but increase your after-tax wealth.