The holiday season is right around the corner! Donating to an organization can be a great way to spread cheer supporting a cause you believe in while also benefiting from a tax perspective. In this article, we will cover tax implications and strategies around five types of donations: cash, appreciated stock, charitable trusts, real estate, and assets. Please keep in mind that while these strategies are a good option for most cases, they may not always serve you best. Be sure to keep your tax professional in the loop when making decisions on charitable donations.
The most common form of donation, cash donations are as simple as sending cash, writing a check, or using a credit or debit card to send money to your preferred organization. They benefit the organization by providing them with liquid cash to spend as needed. They benefit you as you can deduct charitable cash contributions in most cases, and if the donations total under $300, you do not have to itemize. In general, most donations can be deducted up to 50% of your adjusted gross income, or AGI, if made to a qualifying organization. However, donations to private organizations, such as fraternal or veteran foundations are only deductible up to 30% of your AGI. To find out if the organization you are donating to is qualified, use the IRS Tax Exempt Organization Search Tool.
Publicly traded securities make for a fine donation as they are easily transferrable and will grow over time for the organization. By itemizing deductions on your tax return, you may not only benefit from the deduction, but you could also eliminate the capital gains tax that you would have incurred had you sold the asset. Therefore, if you are planning on gifting a fund to charity, it is better to transfer the fund rather than sell it and give them the money, as the organization could benefit more by the amount of tax that would have been paid! What’s more, is you can claim the current fair market value of the stock or fund as a charitable deduction for that tax year, which can save you money either for yourself or further gifting. It is important to note that gifting appreciated stock can make your tax analysis more complicated.
Therefore, a good strategy when gifting money from an appreciated stock is to consider transferring the securities to the organization in lieu of selling. However, if the stock did not appreciate over time and is actually worth less in the present than the time that you bought it, it may be better to sell the stock and gift the proceeds in order to claim the loss on your tax return.
Similar to donating cash, donating funds does have limits when it comes to itemizing deductions. Overall deductions are limited to 50% of your AGI, but the limit for appreciated assets held for longer than one year is 30% of AGI.
Charitable trusts are tools commonly used in estate planning, as they are spread over a long period of time rather than made as a one-time donation. There are two different types of charitable trusts.
The first, called a charitable lead trust, is great for those with substantial wealth who need a place to store assets that are likely to appreciate as time goes on. Generally, these trusts are established over a predetermined period. The charities named in the trust receive interest payments during this period. Once the period expires, the trust is returned to you or a non-charity beneficiary. While trusts are not tax exempt, this strategy could help you avoid gift or estate taxes, however, as you do not have full control over the money, you may not see a great deal of tax savings while alive.
The other option is a charitable remainder trust. This type of trust is a good solution for folks with stocks or real estate. It allows the holder of the assets to sell them without facing taxes on capital gain. They allow for the giver to benefit from the tax deduction as well as reduce their estate taxes. There are two types of charitable remainder trusts: charitable remainder annuity trusts (CRATs) and charitable remainder unit trusts (CRUTs). A CRAT provides income to a non-charitable beneficiary, either for a certain number of years, or the rest of their life. Once the set period ends, the trust’s charity will receive the remaining interest from the trust. The charity may choose to withdraw the interest right away, or allow it to continue to grow in the trust. A CRUT is similar to a CRAT, however, it allows the donor to transfer additional funds to the trust at any time. It also requires for the trust to pay out 5% or more of the original investment every year as income to the non-charitable beneficiary during the set period.
Charitable trusts are good tools, but they are major investments. Much of the time, they require hundreds of thousands of dollars to truly realize the tax benefits as well as the income benefits. It is also important to note that these trusts cannot be dissolved. If the stock market takes a dip, you cannot pull out the funds. It is good to look at this strategy primarily as a tax benefit, not one for increasing wealth.
If you have a home, rental property, land, or other real estate asset that you have held for over a year, you are able to donate it to a charity if you wish. The benefit to doing this is avoiding the capital gains tax. By donating the property to charity rather than selling the property and donating the proceeds, the charity can see more impact by the amount of tax that otherwise would have been paid. On top of that, you may claim the fair market value of the donation on your tax return as a deduction. It is important to note that gifting non-cash assets complicates the tax planning process. Be sure to consult with your tax professional before making the donation.
The simplest way of donating real estate is through direct transfer of the deed or title. This allows you to receive the tax benefits mentioned above. You may also contribute your property to your CRUT (see Charitable Trusts) or sell the property to the charity for under the fair market value, which allows you to incur less capital gains tax as well as claim a deduction on the difference.
Lastly, you may also donate your items to charity and qualify for deductions. Items like clothing, books, supplies, and even vehicles can be donated to charity. When you donate an item, you must use the fair market value to determine the deduction on your cash return. Many donation centers such as Salvation Army or Goodwill provide a Value Guide for items they accept. For items over $5000, you will need an appraisal. The items must be in good condition when donated.
The fall and winter seasons seem to spring thoughts of charitable giving. Donating assets to charity creates a great win-win situation in most cases, in which the organization gets to benefit from the funding or items, and you get to reap the tax benefits. Remember that while each of the strategies in this article are good in most cases, it is always a good idea to consult with a tax professional before taking the leap on any large donations.