Most people wait until late in the year to plan their charitable gifts with the goal of making the gifts by December 31.
That traditional approach often leaves a lot of money and other benefits on the table. Often, gifts are made simply by writing a check or donating some assets.
The first step to more effective charitable giving is to establish a charitable giving plan. Determine how much wealth you want to donate to charity over time, how much you want to make in lifetime gifts, and how much you want to leave in estate bequests. Also, determine the goals of your giving, especially the causes or charities you want to support.
The next step in effective giving is to evaluate the different ways to give, other than writing a check. Charitable giving can provide more than an income tax deduction. Additional benefits might be sheltering capital gains and receiving lifetime income, among others.
You gain significant value by starting early in the year and integrating charitable giving with the rest of your retirement and estate plans.
Remember that to receive a tax deduction for charitable gifts you must itemize expenses on Schedule A. A minority of taxpayers have itemized expenses since the 2017 tax law doubled the standard deduction, because you only use Schedule A when the total of your itemized expenses exceeds the standard deduction.
One way around that problem is to bunch several years of planned charitable contributions into one year.
An increasingly-popular way to bunch donations is to contribute a significant amount of money or property to a donor-advised fund. You qualify to deduct the value of the gift (or gifts) you made to the DAF during the calendar year.
After funding a DAF account, you recommend contributions from the DAF to charities over time in any pattern you want. There’s no minimum annual charitable contribution requirement.
You might want to use a DAF to bunch deductions when your other itemized expenses plus the DAF contributions bring your total itemized expenses well above the standard deduction amount.
You maintain some control over the DAF account, including choosing how it is invested. The investment returns compound tax-free in the account.
Some of the best ways to make charitable contributions don’t involve cash.
Donating appreciated investments from taxable accounts reaps significant tax benefits in addition to bunching charitable contributions in one year. Most DAFs and other charities accept contributions of a wide range of assets, such as stocks, mutual funds, real estate, digital currencies, and more.
Your tax deduction is the fair market value of the property on the date of the gift. There are no capital gains taxes due on the appreciation that occurred while you owned the property. So, you sheltered the capital gains from taxes, qualified for a deduction of the property’s value, and the charity will benefit from the property’s full value.
That’s more beneficial than selling the investment and paying taxes on the gain while separately writing a check to charity.
Several charitable giving strategies generate an additional benefit: regular income.
One strategy is to make a contribution to the charity in return for a charitable gift annuity. The charity pays income to you for either life or a period of years, whichever you select. You can schedule the income to begin immediately or at a later age.
The CGA pays less income than a comparable commercial annuity. The difference in income is your gift to the charity and qualifies as an itemized expense deduction in the year of the gift. The amount of the deduction is determined using current interest rates and a formula issued by the IRS.
Suppose a married couple ages 65 and one 66, donate $100,000 worth of property with a $50,000 basis to a charity in return for a charitable gift annuity with monthly lifetime payments to begin immediately.
At recent interest rates, they would qualify for a charitable contribution deduction of $33,248 in the year of the gift. They’d receive $4,800 annually, paid in monthly installments, no matter how long they live. For 24.6 years, 56.5% or $2,712 of the annual payments would be tax free. The rest would be divided between long-term capital gains and ordinary income.
After that, the entirety of each payment would be taxed as ordinary income.
The details depend on the donors’ age and interest rates in the month the gift is made.
Another gift that generates regular income is the charitable remainder trust.
You donate cash or appreciated property to the trust. The trust sells any property tax free and reinvests the proceeds.
You receive annual income from the trust for either life or a period of years, whichever you select. The payments can be either a fixed amount (known as a charitable remainder annuity trust, or CRAT) or a fixed percentage of the annual trust value (known as a charitable remainder unitrust, or CRUT).
After you pass away or the income period ends, the charity receives whatever is left in the trust, called the remainder interest.
In either case, you qualify for a charitable contribution deduction in the year of the gift equal to the present value of the charity’s remainder interest.
You don’t owe capital gains taxes immediately on the gain you had in the property. Instead, part of each income payment will be taxed as a long-term capital gain over your life expectancy.
The tax code puts minimum and maximum limits on the annual income that can be paid by a charitable remainder trust.
Another strategy that should be considered by anyone who is charitably inclined and older than age 70½ is making qualified charitable distributions (QCDs) from a traditional IRA.
In a QCD, you tell the retirement account custodian to distribute part of the account to a charity. You receive no deduction, but the distribution isn’t included in your gross income. Plus, if you’re taking required minimum distributions (RMDs), the contribution counts toward your RMD for the year.
I’ve discussed QCDs in detail in the past.
Donating a permanent life insurance policy you no longer need can generate tax benefits.
When you transfer a policy with a paid-up cash value to charity, you qualify for a charitable contribution deduction equal to the paid-up value. The charity will name itself the beneficiary. The life insurance benefits won’t be included in your estate and will benefit the charity.
When the life insurance isn’t fully paid up, you can transfer ownership to the charity. You make contributions to the charity to pay the future premiums, which qualify as deductible charitable contributions.
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