Make the Most of Your Charitable Gifts
Four Strategies to Maximize Your Holiday Giving
While gifts of cash can have a tremendous impact, there are ways to give that provide the donor with tax benefits as well.
Our dedicated team can help give your philanthropic efforts a boost.
While there’s nothing wrong with supporting your favorite causes with gifts of cash, a little planning can help your philanthropy go a lot farther. Our Charitable Solutions team’s sole focus is helping families, businesses and nonprofits maximize their giving while they look to create liquidity, mitigate the impact of taxes and build their legacies. Baird Trust President and CIO Mark Nickel and Charitable Solutions Strategist Jonathan Raymon recently sat down to discuss how insights from the Charitable Solutions team can benefit our clients and what makes their expertise unique in the industry.
Donate Appreciated Assets
Marketable securities such as stocks and mutual funds provide an opportunity to gift the full fair market value – and claim a charitable deduction for that full amount – without needing to recognize capital gain taxes on the security’s prior price appreciation. This strategy can be especially useful if your reason to not diversify out of a particular investment is a reluctance generate an additional tax burden. Even if you’re pleased with an investment’s performance, it’s possible to gift shares that have appreciated and still buy additional shares, so that should you sell at some point in the future, the tax burden would not be as great. Assets other than marketable securities, such as real estate, collectibles and even cryptocurrency, may also be gifted. However, these require earlier discussions with charities and may necessitate additional documentation, such as appraisals, or have special rules for the amount that may deductible. Also, smaller charities might not be able to receive any sort of appreciated asset, even marketable securities. In these instances, our next strategy, donor-advised funds, can provide an intermediary that will accept, sell and distribute gifts to the eligible charity of your choice.
Bunch Gifts Using Donor-Advised Funds
Donor-advised funds also provide flexibility in the timing of charitable deductions. The current standard deduction per individual is $13,850 ($27,700 for married filing jointly): Unless your total itemized deductions exceed that amount, you would not receive any tax benefit from your charitable giving. However, using a donor-advised fund, you could “bunch” several years’ worth of giving into a single year to push past the standard deduction and ensure the charitable deduction is used. It would hold those gifted dollars for you to later distribute to your favorite causes on a normal, annual basis.
For individuals whose income fluctuates year-to-year, the ability to deduct charitable contributions in the year of your choosing is significant. The value of a charitable deduction will depend on the tax bracket you’re subject to in a particular year. Setting those charitable gifts aside in a donor-advised fund during high-income years could provide a greater net tax saving. Another benefit: A donor-advised fund can be funded with appreciated assets to further optimize its tax-saving potential.
Consider Qualified Charitable Distributions
Typically, the full amount of a distributi on from a traditional retirement account is taxed at your highest ordinary income tax rate. A charitable deduction could off set some of that tax, but that would only happen if it fully exceeded your standard deduction. In addition, withdrawals from your IRA can cause other credits, exemptions and deductions to be reduced or phased out and may even increase your Medicare Parts B & D premiums. A qualified charitable distribution, which can be made by anyone over 70½ with an IRA, might be a better option. A QCD is a distributi on that goes directly from your IRA to your preferred public charity. With this approach, the distribution is never recognized as income and therefore is not taxed. (Note that if your retirement assets are currently held in a 401(k), you would need to first roll the assets from the 401(k) into an IRA.)
Don’t Forget About State Tax Benefits
If you reside in a state that imposes a state income tax, watch for any available state tax credits in addition to federal income tax deductions. Not every state offers tax credit programs, and the requirements for applying for the credit and using charitable contributions can differ dramatically from state to state. However – when offered – these programs can reduce your state tax liability dollar for dollar from 20% to 50% of the amount of your gifts.
Note that some states might promote endowment funds that benefit charities in the state, while others might promote neighborhood revitalization programs or scholarship programs for lower-income families. Because the options vary, be sure to consult with your local tax and legal advisors.
An Important Reminder for Substantiation Requirements
To receive a charitable deduction for any gift to a 501(c)(3) charity that is $250 or more, you must receive a contemporaneous written acknowledgment from the entity prior to filing your tax return. This acknowledgment must describe the gift given, indicate the date of the gift and include a statement that the nonprofit did not provide goods or services in exchange for the contribution. A common mistake is trying to use a store receipt for items purchased by a donor for the charity: If the charity hasn’t provided the acknowledgement, the receipt alone is insufficient to deduct the gift.
All charitable gifts are documented on Form 8283 as part of your tax return. While the form is not long or difficult, the IRS requires it to be properly completed. Additionally, gifts valued over $5,000 (except for cash or marketable securities) require the declaration of a qualified appraiser.
Annual giving by individuals makes up the vast majority of all charitable gifts – more than foundations, bequests and corporations combined! There is a palpable feeling of satisfaction from giving, and the impact to our local communities cannot be overstated. Our goal is to help ensure those gifts are as effective as possible and help you support the causes you value.
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