Funds incorporate tax benefits with donor control over who receives grants.
What is the most effective way to donate to charity so that they receive the full benefit and I can claim the largest tax deduction?
There are many ways to donate to charity, but some methods are more effective than others. Often, the easiest ways of donating are the least beneficial for the donor from a tax standpoint. Donating cash, using a credit card online, or writing a check, while simple to do, may not be the most tax-efficient methods of giving since you are donating money on which you’ve already been taxed. A donor-advised fund, on the other hand, incorporates the tax benefits of donating appreciated assets while providing the donor with the control of deciding which organizations receive their charitable grants, when those grants take place, and in what amounts.
Now regarded as the fastest-growing charitable giving vehicle in the United States, a donor-advised fund is like a charitable investment account, used for the purpose of supporting charitable organizations you care about. When you contribute cash, stocks, or non-publicly traded assets such as real estate, private business interests, and private company stock to a donor-advised fund, you are usually eligible to take an immediate tax deduction for the full value of the asset.
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Once in the fund, those assets are usually sold with no tax liability and reinvested into other investment options that continue to grow tax free until you direct grants to any Internal Revenue Service-qualified public charity.
As an example, let’s say you invested $20,000 in a stock that over the years grew to $100,000. If you sell the stock, you would likely pay 15%-20% long-term capital gains tax on the $80,000 gain. At a 20% capital gains rate, that could be as much as $16,000! After taxes had been paid, you could donate the remaining $84,000 ($100,000 minus $16,000) to charity. The amount paid in capital gains taxes significantly reduces the amount available to donate to the charity and reduces the amount you can take as a tax deduction.
With a donor-advised fund, you would donate the full $100,000 of appreciated securities. The fund can sell the assets without having to pay capital gains taxes, and you receive the full $100,000 tax deduction in the year the assets are donated. The assets can then be reinvested, and charitable grants distributed to qualified charitable organizations at any time. You are not required to distribute all the assets in the year they are transferred to the fund. In fact, grants can be spread out over many years and passed down to children and grandchildren.
Next:"A donor-advised fund is a great tool for teaching family and loved ones about the benefits of long-term charitable gifting"
A donor-advised fund is a great tool for teaching family and loved ones about the benefits of long-term charitable gifting. It is important to note, however, that contributions to a donor-advised fund are completely irrevocable, and the requirements for how often grants must be made can vary among different funds.
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Keep in mind that all charitable tax deductions are limited based on IRS rules. Under the new tax law, individuals can take tax deductions up to 60% of their adjusted gross income (AGI) for cash contributions and up to 30% of their AGI for non-cash assets (investments, property, business assets, etc.). You can contribute more than those amounts into a donor-advised fund, but any excess charitable deductions over the 60%/30% must be carried forward to future years. Excess charitable deductions can be carried forward for up to the following 5 years. Overall, if you itemize your deductions, contributing appreciated assets to a donor-advised fund is an excellent way to increase your total itemized deductions in a tax-advantaged way. Even with the new tax law changes, they remain an attractive vehicle for making long-term charitable donations.
I’m over age 70½and heard that making a Qualified Charitable Distribution from my retirement account may be a good way to save on my taxes. Can you explain the benefits of making this type of gift?
A Qualified Charitable Distribution (QCD) can be an effective way to donate to a charity if you are over age 70½. Instead of taking your required minimum distribution (RMD), paying income taxes on the distribution, and then giving what’s left to the charity, you can just donate up to $100,000 of the RMD directly to the charity itself. It will satisfy your RMD for the year, and you will not have to include the distribution amount in your taxable income that year. QCDs have a dual benefit that you won’t find in many other charitable gifting strategies.
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Send your questions about estate planning, retirement, and investing to Jeff Witz, CFP, and David Zemon c/o Urology Times, at UT@advanstar.com Questions of general interest will be chosen for publication. The information in this column is designed to be authoritative. The publisher is not engaged in rendering legal, investment, or tax advice.