It’s hard to believe that the end of the year is right around the corner. As most of us are swept up finalizing our gift lists and making arrangements to visit family, many are also looking for charitable giving opportunities this Christmas season. At jhh wealth, we help our clients structure their charitable giving tax efficiently in order to maximize donations to the charitable cause of their choice.
Every situation is different, so you should always check with your tax advisor before making any final decisions.
Here are some things to consider as you determine the best strategy for your situation:
The income tax deduction
Direct gifts to charities made during life will usually generate a current income tax deduction for the donor. Under certain conditions, even maintaining a remainder interest in the property can still generate a deduction (more on that in future pieces). The amount of the deduction depends on the type of charitable organization and property being donated.
Type of Charity: 30% or 60% organization?
The deduction you receive will be limited to either 20 percent, 30 percent, or 60 percent of a taxpayer’s adjusted gross income (AGI). To receive the higher deductions, a taxpayer must give to:
- A qualified public charity (including churches, schools, hospitals)
- A private operating foundation, or
- A private non-operating foundation who distributes their contributions to either public charities or private operating foundations within two and on-half months of their tax year-end.
Type of Property: 20%, 30% or 60% Deduction?
After determining the type of charity receiving the donation, you should consider the type of property being contributed. There are many exceptions and nuances at which deduction level the property qualifies, as well as whether the taxpayer can claim the full fair market value of the asset or just the adjusted basis in the property. For the purposes of this writing, here is a table to illustrate the possibilities:
If you donate more than the AGI limit, then you can carry over the deduction for the next 5-years. Whether donating collectibles, cash, or real estate, considering the tax implications will determine the best way to maximize your giving this season.
Amplify your charitable giving with capital gains
Thoughtful planning around assets can amplify your charitable impact beyond a current year tax deduction.
For a simple long-term capital gain example, say you own 500 shares of ACME currently valued at $100 (so $50,000 total) with a basis of $20 a share. You would like to give $50,000 (20% of your AGI) to your local church and will use these shares to fund the donation. You will be taxed at 20% for capital gains.
- If you sell the stock and then donate the proceeds to charity, you will need to come up with an additional $8,000 for Uncle Sam (not including state taxes). Therefore, you will need to have $58,000 total cash budgeted for the charity to get $50,000.
- However, if you donate the stock directly to the charity (or to another vehicle), then you can wipe away the tax on capital gains and amplify the donation. Since it is considered intangible property, donors can use the fair market value as their deduction against current AGI.
Because of the amplification of paying no capital gains, many could benefit from donating long-term capital gain property with big gains; however, this is dependent on your own circumstances. The capital gain “booster” unlocks a variety of ways that you can be creative with your giving to expand your charitable impact and leave a lasting legacy. We will be writing on more complex ideas for donations in future pieces.
How to donate?
There are a variety of ways to donate to charities directly or through charitable vehicles like donor advised funds (DAF), charitable remainder trusts (CRTs), foundations, and more. While all have their pros and cons, they provide the donor with a vehicle to claim an income tax deduction, grow or sell the donated assets, and then transfer them to a charitable organization. Additionally, donors can even receive an income interest from vehicles like a CRT, or even set up their own scholarship fund for an individual with a private foundation.
These present donors with great opportunities to personalize your charitable giving to fit your situation.
jhh wealth is experienced in helping our clients identify unique ways to maximize their charitable giving and leave a legacy for generations. It is always critical that you discuss any tax planning with a CPA before moving forward. For additional details or to work on a plan with jhh and your CPA, or if you need a referral to a jhh strategic CPA partner, contact us in Greenville, SC at (864) 584-7686.
The information presented here is not specific to any individual’s personal circumstances. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. This information may change at any time without notice.