Charitable giving in the U.S. reached a record high of over $4.7 billion in 2020. While giving to a cause you care about is rewarding by itself, there are also a myriad of potential financial benefits to consider as well. There are numerous ways to give, each with their own potential benefits.
Cash giving is the simplest form of charitable donation. Your tax deduction will be equal to the amount donated (minus the value of any goods or services you may receive in exchange). Memberships to non-profits such as museums are often considered cash gifts.
Donating stocks can be an incredibly tax-efficient way to give. Since you aren't selling the stocks, there will be no capital gains taxes. If the stocks were purchased more than a year ago and have risen in value since purchase, their full market value is eligible for tax deduction.
You can also donate real estate to charity. If you have property you aren't using but will have to pay a large tax upon selling of that property, donating may be a good option. You can also arrange to donate property upon your death, allowing the donation only when you no longer need a place to live.
A donor-advised fund is an investment account sponsored by a non-profit organization. You can contribute cash, securities, real estate, and other property to the fund. The donation is tax deductible. Donors are able to make recommendations as to the direction of the fund, though the non-profit organization makes the final decisions.
Charitable trusts are a giving strategy utilized by those wishing to establish income streams for themselves or their heirs in addition to charitable organizations. There are two types of charitable trusts: Charitable Lead Trust (CLT) and Charitable Remainder Trust (CRT).
A CLT allows you to transfer assets into the trust and donate a stream of income generated by the trust to a charitable organization each year. At the end of the established period, any money left in the trust can be disbursed to other beneficiaries or held in the trust. This allows you to provide consistent cashflow to a charity, but is also a great vehicle to transfer wealth to heirs.
With a CRT, generated income will be distributed to beneficiaries during your lifetime while the charity will receive what remains after you pass away. This is often utilized by those with high-value assets who want to set up an income stream for themselves while also providing support to a charitable organization. With both types of trust, assets cannot be removed once they are transferred.
Giving assets such as retirement accounts and life insurance policies have dual tax benefits. In addition to the donation being deductible from your income tax, the donations will not be recognized as part of your estate, lowering potential estate taxes. People will often donate assets with income tax liability while leaving tax-deferred assets to their heirs.
Qualified Charitable Distributions
A Qualified Charitable Distribution (QCD) is for those over the age of 70 ½ who don't want or need the required minimum distribution from their IRA. The distribution (up to $100,000 for an individual) will instead go to a charity of your choice. The QCD will not be counted as income, which can help reduce social security taxes as well as Medicare premiums.
Private foundations are charities set up as charitable trusts or corporations. This is a great avenue for those looking to be heavily involved with a cause that is held near and dear. Private foundations are subject to stricter regulation and tax laws, but allows donors to retain the most control of donated assets.
The information provided is for informational purposes only. It is not intended to be used, and should not be used, as the sole basis for legal and/or tax advice. Individuals should seek and rely upon the guidance and advice of their own legal and tax counsel before making any decisions regarding any planning, investment, tax concepts or strategies discussed herein. Individual circumstances may vary and results discussed are no guarantees of applicability or future performance.