Despite the recent downturn in the economy, it appears that members of community continue to be generous to their favorite causes. It is only by and through the use of donations that many charitable and other not-for-profit organizations are able to continue to provide services for and in support of the local community.
In addition to enabling your favorite organizations to continue their good works, charitable giving can be an important part of your overall income tax and estate planning strategy. While you should consult with your attorney and financial or tax advisor to better understand how the tax laws apply to your particular situation, this article presents an overview of various strategies you should consider in connection with your goal of providing support to your favorite organizations.
Income Tax Deductions. If you itemize your income tax deductions, you may claim all contributions to qualified charitable organizations as deductions. While at this time only taxpayers claiming itemized deductions get this income tax benefit, Congress has been considering providing this benefit to people who support charitable organizations even if they do not itemize their tax deductions!
Deductible Amount. The amount you can deduct for charitable contributions is generally the fair market value of your gift. For cash contributions, you may deduct 100 percent of your gift. For gifts of other property, such as art work, prizes and awards, stocks, or other items, you will need to determine the market value of your gift. If the gift is of significant value, it is always prudent to obtain an appraisal of the gift for tax reporting purposes. Before making a gift of property other than money, you must have owned the property for at least one year before giving it away.
Limitations on Deductions. The tax laws do place some limits on the total amount of charitable contributions which may be claimed on individual tax returns. For contributions of cash to public organizations, you may claim deductions up to 50 percent of your adjusted gross income. For gifts of appreciated securities, there is a limitation of 30 percent of your adjusted gross income. Deductions in excess of these limitations can be carried forward and utilized as income tax deductions in future tax years, for up to five years.
The Value of Giving Appreciated Securities. By donating stocks (securities) which have risen in value since you purchased them, you will receive two primary tax benefits. Provided you have owned the securities for more than one year, you: (i) may claim an income tax deduction for the appreciated value; and (ii) you also avoid paying income tax on the capital gain associated with the securities (i.e., the appreciation of the stock value, which is otherwise taxed as personal income).
You purchased 100 shares of Nike stock for $6.00 many years ago. Today, the value of the Nike stock has risen to $65.00. Therefore, your original investment of $600.00 has risen in value to the amount of $6,500.00. If you simply sold the shares of stock today, you must count 100 percent of the increase in value of the shares (or the amount of $5,900.00) as income, upon which you must pay income tax (which would roughly be a tax of nearly $1,500.00, leaving you with only $5,000.00 to spend or donate).
However, if you donate your shares to a qualified charitable organization: (i) you will receive an income tax deduction in the full amount of $6,500.00; and (ii) you will pay absolutely no income tax on the gain in value of the shares of stock. The charitable organization is then free to sell the shares of stock with no adverse income tax consequences and utilize the proceeds of the sale toward the organization’s purposes.
A Note Regarding Limitations on the Value of Giving Appreciated Securities. If you have owned the security for less than one year, your income tax deduction is limited to your cost basis (i.e., the purchase price). If you donate securities which have fallen in value, your income tax deduction is limited to its market value.
Other Charitable Giving Strategies.
Testamentary gifts. An excellent way to provide support for your favorite charitable organizations without having to forgo the benefit of spending money which is currently available to you for your personal needs and desires is to make a gift to the organizations you would like to support at the time of your death. By making a cash gift in your last will or revocable living trust, you can provide a meaningful, memorial gift in your name to one or more organizations and still provide amply for your children and other named beneficiaries.
Charitable Trusts. There are several strategies which individuals may employ with the assistance of their estate and tax planning professionals. Examples of such strategies include charitable remainder trusts and charitable lead trusts. If you are philanthropically inclined, charitable trusts offer a variety of advantages, both during your lifetime and in terms of estate and inheritance tax savings.
Charitable Remainder Trusts. With a charitable remainder trust, a donor contributes some form of property (typically money, securities, or real property) to a trust. During the donor’s lifetime (or some other time period, which may include a term of years or even the Donor’s children’s lifetimes) the income from the property held in trust is distributed to the donor (and/or the donor’s spouse and children). At the close of the specified time period, the remainder of the property held in trust is transferred to the donor’s chosen charitable organization.
The benefits provided by charitable remainder trusts are numerous. First, you receive a partial income tax deduction for your donation, based on the market value of the property which your selected charitable organization will ultimately receive. This value is also removed from the total value of your estate, meaning that your family will not be required to pay estate taxes on this amount upon the event of your death. Also, you will receive a lifetime income stream in return for your donation, which may in some circumstances even be greater over time than the value of the property which you originally contributed to the trust!!
Charitable Lead Trusts. With a charitable lead trust, the effect is the opposite of a charitable remainder trust. In this case, the donor contributes property to a trust. However, during the donor’s lifetime (or other specified time period), the income from the property held in trust is distributed to the donor’s chosen charitable organization. At the close of the specified time period, the remainder of the property held in trust is transferred to the donor’s estate or the donor’s other named beneficiary (e.g., his or her children). For charitable trusts, qualified legal and tax assistance is required to achieve your desired outcomes.
Family Foundations. Family foundations can be nonprofit corporations or trusts and may be formed to administer gifts for the benefit of one or more particular groups, causes, or organizations and should not be mistaken as charitable giving methods only to be utilized by wealthy individuals and families. A family foundation can provide stability and continuity for the groups and organizations it serves. Parents with strong philanthropic goals can pass this legacy on to their children through the use of a family foundation. A family foundation can create incentives for family members to make charitable gifts and bequests by: (i) giving a family name a place in the philanthropic history of the community; (ii) providing efficient management of investment funds; (iii) providing income tax benefits associated with making charitable gifts; and (iv) providing flexibility to meet the income and other important needs of donors.
Conclusion. Charitable contributions are critical to many worthwhile organizations in carrying carry out their missions. Donors benefit from: (i) the ongoing operations of their selected organizations; (ii) from the emotional satisfaction which develops naturally with gift giving; and (iii) the income and estate tax benefits achieved through their gifts. Federal and State tax laws are structured to encourage individuals to make gifts to charitable organizations, and there are many, many ways to maximize the income and estate tax benefits of making gifts to such entities. To learn more about the advantages of charitable donations, you may feel free to contact us directly.