Don’t wait until late in the year to plan your charitable gifts. Maximize the benefits to both the charity and you by considering contribution strategies throughout the year and implementing them well before December 31.
When most people think of the benefits of charitable gifts, they think of tax deductions. But many giving strategies provide other benefits. Realizing this and integrating charitable giving with the rest of your retirement and estate plans can yield significant value.
For most people, simply writing a check to charity doesn’t generate the tax benefits it used to and has far fewer benefits than other charitable strategies.
You have to itemize expenses on Schedule A to deduct charitable gifts. A minority of taxpayers itemize expenses since the standard deduction was doubled in the 2017 tax law, because you only use Schedule A when the total of your itemized expenses exceeds the standard deduction.
One way around that problem is to bunch several years of planned charitable contributions into one year.
An increasingly-popular way to bunch donations is to contribute a significant amount of money or property to a donor-advised fund (DAF).
You take a deduction for the value of the gift (or gifts) you made to the DAF that year. You might want to use a DAF to bunch deductions when your other itemized expenses plus the DAF contributions bring your total itemized expenses well above the standard deduction amount.
You recommend contributions from the DAF to charities over time in any pattern you want. There’s no minimum annual contribution requirement.
You maintain some control over the DAF account, including choosing how it is invested. The investment returns compound tax-free in the account.
Some of the best ways to make charitable contributions don’t involve cash.
Donating appreciated investments from taxable accounts reaps significant benefits. Most DAFs and charities accept contributions of a wide range of assets, such as stocks, mutual funds, real estate, digital currencies, and more.
Your tax deduction is the fair market value of the property on the date of the gift. There are no capital gains taxes due on the appreciation that occurred while you owned the property. So, you sheltered the capital gains from taxes, qualified for a deduction of the property’s value, and the charity benefits from the property’s full value.
That’s how donating an appreciated investment often generates more benefits for you and the charity than writing a check to charity and separately selling the investment and paying taxes on the gain.
Several charitable giving strategies generate an additional benefit: guaranteed lifetime income.
One strategy is to make a contribution to the charity in return for a charitable gift annuity (CGA). The annuity pays income to you for either life or a period of years, whichever you select. You can schedule the income to begin immediately or at a later age.
The CGA pays less income than a comparable commercial annuity. The difference is your gift to the charity and qualifies as an itemized expense deduction in the year of the gift. The amount of the deduction is determined using current interest rates and a formula issued by the IRS.
For example, Max and Rosie Profits, a married couple ages 65 and one 66, donate $100,000 worth of property with a $50,000 basis to a charity in return for a charitable gift annuity. Monthly lifetime payments are to begin immediately.
The Profits will receive a charitable contribution deduction of $33,248 this year. Each year they’ll receive a total of $4,800, paid in monthly installments, no matter how long they live. For 24.6 years, 56.5% or $2,712 of the annual payments will be tax free, $1,356 will be capital gains, and $2,088 will be ordinary income.
After that, the entirety of each payment will be taxed as ordinary income. The details depend on your age and interest rates in the month you make the gift.
Another gift that generates annual income is the charitable remainder trust.
You donate cash or appreciated property to the trust. The trust sells any property tax free and reinvests it. 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 CRAT) or a fixed percentage of the annual trust value (known as a charitable remainder unitrust, or CRUT).
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 qualify for an immediate tax deduction equal to the present value of the charity’s estimated remainder interest. You don’t owe capital gains taxes on the gain you had in the property. Instead, part of each income payment will be taxed as a long-term capital gain over your life expectancy.
For example, suppose Max and Rosie Profits contribute $100,000 of appreciated property to a CRUT. The trust will make annual payments of 5% of the trust’s current value, beginning immediately.
The first year’s income will be $5,000. The Profits will receive an income tax deduction of $30,648 the year they contribute to the trust.
The tax code puts minimum and maximum limits on the annual income that can be paid by a charitable remainder trust.
As I’ve explained in the past, anyone who is charitably inclined and older than age 70½ should consider making qualified charitable distributions (QCDs) from a traditional IRA.
In a QCD, you tell the retirement account custodian to distribute part of the account 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.
Donating a paid-up permanent life insurance policy you no longer need can generate tax benefits.
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 future premiums. The premium payments qualify for a charitable contribution deduction.
There are a number of ways to make charitable gifts that generate tax deductions and create other benefits. Begin planning early in the year, and you’ll increase the benefits to you and the charity.