How Your Generosity Can Give Back at Tax Time

As fulfilling as donating money or other assets to a charitable, philanthropic or other not-for-profit organization can be, let’s not overlook the tax benefits that accompany a donation or gift.

“Outside of the ‘feel-good’ sentiment, charitable giving can reduce tax liability and put one in a better financial position,” observes Taylor R. Schulte, a Certified Financial Planner™ with Define Financial in San Diego, Calif.

Whether a donation is made in the form of cash, an investment security such as shares of stock, tangible goods like clothing or a car, or some other asset, it can reduce the donor’s income tax (through deductions), capital gains tax (by donating securities or property whose value has appreciated) and/or estate tax (by reducing the taxable amount in an estate) burden, thanks to federal tax laws. “We are a philanthropic nation,” says Certified Financial Planner™ Rita Cheng, founder of Blue Ocean Global Wealth, an investment advisory firm in Rockville, Md., “and our tax code encourages charitable giving.”

For people with charitable or philanthropic inclinations, here’s a look at some of the strategies and techniques to maximize the tax benefits that accompany their generosity. Be sure to consult a tax professional such as a certified public accountant for guidance on evaluating and implementing the giving strategies that are most appropriate to your circumstances and priorities.

Donating highly appreciated securities: If you’re in a giving frame of mind and you own securities (such as stocks, bonds or mutual funds) whose value has increased significantly since you first assumed ownership of them you can donate that appreciated stock to a charitable organization in lieu of giving cash. “It’s a trifecta,” explains Cheng:Not only does the organization inherit a valuable asset that they can hang onto or liquidate, the donor is no longer on the hook to pay capital gains taxes — the rate of which recently increased from 15% to 20% — on those stocks when they’re sold. The donor also gets a substantial tax deduction of up to 30% of gross income for the donation.

Direct donations of clothing and other goods. Those ill-fitting or out-of-fashion clothes stashed away in your home, toys, books or games the kids no longer use, or even that past-its-prime automobile that still has some mileage left in the tank, can make for good charitable donations to organizations like Goodwill and the Salvation Army, particularly if you itemize deductions on your tax returns. “Be sure to have a solid system for tracking them,” Cheng says, “because they do add up.”

A driving deduction for donating your time. If you drive your vehicle in order to perform volunteer work on behalf of a non-profit organization, you may be eligible to claim a tax deduction based on the mileage you drive, notes Cheng.

Donating a distribution from a retirement account directly to charity. If you are faced with taking a required minimum distribution (RMD) from a retirement account such as an IRA once you hit age 70.5, if you don’t need that money to meet living expenses, and you’re seeking a tax-efficient giving option, consider donating that RMD directly to a charity, suggests Cheng. You’ll avoid paying income tax on the RMD amount. What’s more, the RMD won’t be counted as income, an important consideration for people who otherwise might be pushed into a higher income tax bracket in a given year by taking the RMD.

Giving to a donor advised fund (DAF). Like the idea of giving to specific causes or charities but prefer to do so anonymously? Typically run by a bank or charity, a donor advised fund will take your gift — cash or an asset such as an appreciated security — and use it to make donations to the organization(s) you choose, without naming you as the donor. The donor receives a tax deduction of up to 50 percent of adjusted gross income for cash contributions and up to 30 percent of adjusted gross income for appreciated securities. Donors also can contribute real estate, limited partnership interests and other privately held assets to a DAF.

Giving to a private or family foundation or trust. Foundations and trusts represent two of the more tax-efficient yet complex vehicles for fulfilling one’s charitable or philanthropic inclinations. As such, it’s vital to engage a professional with expertise in charitable giving strategies, taxation and (because these types of vehicles may involve the transfer of wealth after a donor’s death) estate planning.

A private foundation is an organization created by an individual or family donor, expressly to distribute funds to organizations of the foundation’s choosing. Likewise, trusts — the charitable retained annuity trust, the charitable remainder trust, and the charitable lead trust are among the more popular — often are established by an individual or family to house and distribute assets to charitable and philanthropic organizations. Assets such as cash, appreciated assets and the like can be gifted to the foundation or trust, with tax benefits resulting if the maneuver is executed properly.

BOILERPLATE

January 2016 — This column is provided by the Financial Planning Association® (FPA®) of Minnesota, the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Minnesota if you use this column in whole or in part.


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