With the holiday season upon us and the end of the year approaching, we pause to give thanks for our blessings and the people in our lives. It is also a time when charitable giving often comes to mind. The tax benefits associated with charitable giving could potentially enhance your ability to give and should be considered as part of your year-end tax planning.
Giving not only means giving to a favorite charity, it can also mean helping a family member financially. Before you make a donation or gift, however, it’s important to choose the right strategy, paying close attention to potential tax and legal implications. You should always consult with your CPA for final tax advice.
Strategies to Consider
You’ve likely given some thought to the charitable organization you’d like to benefit and the amount you plan to donate. But have you considered the charitable giving vehicle you’ll use to make your gift?
Let’s look briefly at some of the options:
- Outright Gifts
Outright gifts of cash or property benefit charitable organizations by providing immediate resources. Benefit doubly if you give or gift appreciated stock or property. You’ll get to deduct its value on the date of the gift, plus you’ll avoid paying capital gains on the appreciation. Consider cleaning out your closets and donating gently-used clothing and household goods to a qualified charitable organization. Be sure to keep your receipts or bank records to validate any income tax deductions you wish to claim. Keep in mind that you may need a professional appraisal to qualify for a tax deduction on certain noncash contributions.
- Qualified Charitable Distributions (QCD)
A QDC allows all or part of your distribution made directly from your IRA to a qualified charity for individuals age 70½ or older. QCDs aren’t subject to ordinary federal income taxes, allowing a donation to your charity of choice without incurring the ordinary income taxes you would otherwise incur on an IRA distribution.
- The maximum annual amount that can qualify for a QCD is $100,000. This applies to the sum of QCDs made to one or more charities in a calendar year. (If, however, you file taxes jointly, your spouse can also make a QCD from his or her own IRA within the same tax year for up to $100,000.)
- The distribution must be made directly from your IRA to a public charity (i.e., they cannot be made to a private foundation, a supporting organization, or a donor-advised fund)
- For a QCD to count towards your current year’s RMD, the funds must come out of your IRA by your RMD deadline, which is generally December 31 each year.
- Donor-Advised Funds
A donor-advised fund is a charitable giving vehicle managed by a public charity for the purpose of distributing funds to other charities. When you contribute to a donor-advised fund, you can advise the charity on the grants it makes, as well as take advantage of possible tax deductions. Be aware, however, that there may be a minimum donation amount, and administrative fees may cut into the funds available for grants.
- Charitable Remainder Trusts
With this type of trust, the donor receives income from the trust for his or her lifetime, the lifetime of another person, or a period of up to 20 years. At the end of the specified term, the remaining trust assets are distributed to a charitable beneficiary. The greatest benefit of a charitable remainder trust is that you can take advantage of immediate tax benefits while continuing to utilize the assets, as you may deduct the present value of the charitable remainder interest. On the downside, charitable trusts tend to be complex to set up and usually require legal and administrative support.
- Charitable Gift Annuities
A charitable gift annuity is a split-interest gift made directly to a charity that provides you, your spouse, or a family member with fixed income payments for life. The charity typically ends up with about half of your donation, while you get an immediate tax deduction and some guaranteed income. Keep in mind that an annuity is a contract between you and the charity, and your return isn’t guaranteed by the government.
- Private Foundations
A private foundation is a charity established by an individual, family, or corporation. Although it offers donors a great deal of control over their gifts, a private foundation can be costly to administer, and it must adhere to a strict set of rules designed to ensure that it carries out its charitable purpose.
If you wish to give to charity posthumously, you may make bequests by way of your will, trust provisions, or beneficiary designations. Although bequests offer simplicity and are easy to set up, they are not income tax-deductible during your life.
If you itemize deductions on your income tax return, you can generally deduct your gifts to qualified charities. However, the amount of your deduction may be limited to certain percentages of your Adjusted Gross Income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 50% of your AGI for the year, and other gifts to charity may be limited to 30% or 20% of your AGI. Charitable deductions that exceed the AGI limits may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years. Your overall itemized deductions may also be limited based on the amount of your AGI. And make sure to retain proper substantiation of your deduction for a charitable contribution.
Gifting to Family Members
Giving back doesn’t always mean giving to charity. Gifting to family members can be just as rewarding, and it may also be an effective way to transfer wealth while reducing or avoiding taxes. Here are several common strategies for gifting to family members:
- Making an Outright Cash Gift
For the 2016 tax year, you may gift up to $14,000 to an individual without tax consequences ($28,000 for married couples). If you’d like to gift more than this amount to one person, you’ll need to file IRS Form 709, the Gift Tax Return.
- Paying College Tuition or Medical Bills Directly
If you’d like to help out a family member by paying expenses directly to the provider, the $14,000 limit does not apply. Plus, you’re still free to give the individual a separate tax-free gift, up to $14,000.
- Contributing to a 529 plan
With this strategy, you can contribute to a grandchild or other relative’s college education while paring down your own estate. Contributions to 529 plans grow tax-deferred, and withdrawals for the beneficiary’s education are tax-free at the federal level (and usually at the state level, too).
How can we help?
With all the options available, choosing the best way to give to charity or family members can seem overwhelming. Don’t hesitate to reach out to us if you’d like to discuss various strategies. We’re happy to help you select an option that makes sense for you, your family, and your financial situation.
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