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Donations may now be more powerful Donations to qualified charities are generally fully deductible for both regular tax and AMT purposes, and they may be the easiest deductible expense to time to your tax advantage. After all, you control exactly when and how much you give. So not only can charitable giving provide much-needed support to causes you care about, but it also can be a powerful tax-saving tool. Your donations may now be even more powerful if you’re a higher-income taxpayer. On the other hand, you also could be subject to the return of the reduction of itemized deductions, which could reduce the tax benefit of your charitable gifts. To ensure your gifts do as much as possible for both your favorite charities and your tax bill, discuss with your tax advisor which assets to give and the best ways to give them. Cash donations Outright gifts of cash (which include donations made via check, credit card and payroll deduction) are the easiest. The key is to substantiate them. To be deductible, cash donations must be:
Deductions for cash gifts to public charities can’t exceed 50% of your adjusted gross income (AGI). The AGI limit is 30% for cash donations to nonoperating private foundations. Contributions in excess of the applicable AGI limit can be carried forward for up to five years. Stock donations Publicly traded stock and other securities you’ve held more than one year are long-term capital gains property, which can make one of the best charitable gifts. Why? Because you can deduct the current fair market value and avoid the capital gains tax you’d pay if you sold the property. Donations of long-term capital gains property are subject to tighter deduction limits — 30% of AGI for gifts to public charities, 20% for gifts to nonoperating private foundations. In certain, although limited, circumstances it may be better to deduct your tax basis (generally the amount paid for the stock) rather than the fair market value, because it allows you to take advantage of the higher AGI limits that apply to donations of cash and ordinary-income property (such as stock held one year or less). Don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity. Other types of donations Gifts of cash are simple and gifts of stock can be tax-smart, but many taxpayers make other types of donations, such as vehicles, collectibles, services and even use of property. For an overview of the deductibility of various types of donations, see “How much is my charitable donation deduction?” Private foundations If you don’t know which charities you want to benefit but you’d like to start making large contributions now, consider a private foundation. It offers you significant control over how your donations ultimately will be used. You must comply with complex rules, however, which can make foundations expensive to run. Also, the AGI limits for deductibility of contributions to nonoperating foundations are lower. If you’d like to influence how your donations are spent but avoid a foundation’s down sides, consider a donor-advised fund (DAF). Many larger public charities offer them. Warning: To deduct your DAF contribution, you must obtain a written acknowledgment from the sponsoring organization that it has exclusive legal control over the assets contributed. Charitable remainder trusts To benefit a charity while helping ensure your own financial future, consider a charitable remainder trust (CRT):
A CRT also can help diversify your portfolio if you own non-income-producing assets that would generate a large capital gain if sold. Because a CRT is tax-exempt, it can sell the property without paying tax on the gain at the time of the sale. The CRT can then invest the proceeds in a variety of stocks and bonds. You’ll owe capital gains tax when you receive CRT payments, but because the payments are spread over time, much of the liability will be deferred. Plus, only a portion of each payment will be attributable to capital gains; some will be considered tax-free return of principal. This may help you reduce or avoid exposure to the new 3.8% Medicare contribution tax and the return of the 20% top long-term capital gains rate. You can name someone other than yourself as income beneficiary or fund the CRT at your death, but the tax consequences will be different. Charitable lead trusts To benefit charity while transferring assets to loved ones at a reduced tax cost, consider a charitable lead trust (CLT):
For gift tax purposes, the remainder interest is determined assuming that the trust assets will grow at the Section 7520 rate. The lower the Sec. 7520 rate, the smaller the remainder interest and the lower the possible gift tax — or the less of your lifetime gift tax exemption you’ll have to use up. If the trust’s earnings outperform the Sec. 7520 rate, the excess earnings will be transferred to the remainder beneficiaries tax-free. Because the Sec. 7520 rate currently is low, now may be a good time to take the chance that your actual return will outperform it. Plus, with the currently high gift tax exemption, you may be able to make a larger transfer to the trust this year without incurring gift tax liability. You can name yourself as the remainder beneficiary or fund the CLT at your death, but the tax consequence will be different. |
