NEIRG identifies some strategies to consider as you plan your charitable giving.
Always verify the charities you are donating to are legitimate and you should consult with your financial advisor to understand the tax laws apply that to your specific situation. Charitable contributions enable organizations to carry out their goals. Donors can get personal satisfaction and tax benefits through charitable givingThe tax laws encourage giving, there are ways to maximize the tax benefits.
Income Tax Deductions
If you itemize your deductions, contributions to qualified charitable organizations can be claimed as deductions. There has been lots of discussion around tax law changes about enabling non-itemizers to also get tax benefits from charitable contributions. At this time, however, only taxpayers claiming itemized deductions get to use the benefit.
The amount you can deduct for charitable contributions is generally the fair market value of what you give. For cash gifts, your deduction is just how much you gave. If you gift other property (like stocks or real estate), determining fair market value can be more difficult. For publicly traded securities, fair market value is calculated as the average of the high and low prices for that security on the date it was transferred to the charity. For non-publicly traded securities, you will need to get an appraisal to determine the fair market value. In addition, the property (or securities) must have been held for at least one year.
Limits on Deductions
The tax laws do place limits on a number of charitable contributions that can be claimed on individual tax returns. For contributions of cash to public charities (not private foundations), you may claim deductions up to 50% of adjusted gross income. If appreciated securities are given, there is a limitation of 30% of adjusted gross income. Deductions in excess of these limitations can be carried forward and used over a five year period.
Why give appreciated securities?
Donating stocks (or other securities) that have risen in value since they were acquired offers two tax benefits. As long as you have held the securities for more than a year, you can claim a deduction for the appreciated value and you avoid paying tax on the capital gain. If you have held the stock for less than a year, your deduction is limited to your cost basis. If you donate a stock that has fallen in value, your deduction is limited to the fair market value.
Consider the following:
You bought 100 shares of ABC stock years ago for $20 per share and it has now risen to $100 per share. Your $2,000 investment is now worth $10,000 and you wish to give $10,000 to a charity.
If you donate the shares to a charity, you get a deduction for $10,00 and pay no income tax on the gain. If you sell the shares, you would pay tax on the capital gain. By giving the shares you avoid the capital gains tax and the charity gets the full $10,00 value. The charity could then sell the shares and have the proceeds to use.
One of our recommended contribution options is the donor advised fund. These funds have been established by mutual fund companies. They operate in the following way:
— A person donates cash or appreciated securities to the “donor advised fund.” These funds often require a minimum of $10,000. It’s important to note the contribution is irrevocable.
— The donor gets a tax deduction for the contribution in the year it is made.
— The fund invests and manages the contribution along with the rest of the moneys within the fund.
— The donor can recommend which charities receive the contributions.
— The “donor advised fund” reviews the recommendation and makes the contribution.
The benefits of this include the ability to get an immediate deduction while the contributions are made later. The fund professionally manages the money and handles the paperwork.
There are trust strategies such as – charitable remainder trusts and charitable lead trust. With a charitable remainder trust, a donor contributes property (usually money, securities or real estate) to a special form of trust. During the donor’s lifetime or some period, the income from that property is distributed to the donor. On the donor’s death or at the end of the specified period, the remainder goes to the charity.
With a charitable lead trust, the effect is the opposite. The charity gets the income for the lifetime of the donor (or a set time period) and the remainder goes to the donor’s estate or beneficiary at death or term end. These types of trust can be complicated to administer and are part of a sophisticated estate plan. Qualified legal advice is needed.