Charitable giving not only improves the lives of others but has been shown to increase happiness more than personal spending on oneself[1]. Additionally, improved happiness and health has been linked to reduced rates of stress and lower blood pressure[2]. To make your giving the most thoughtful, ask yourself these three questions.
Which Charity? We recommend finding a charity that aligns with your values. Begin by searching for charities that help causes that are important to you. Searching on websites like Philanthropedia, Give Well and Great Nonprofits can provide details about how the charity uses the donations. After finding a few charities that inspire you, we recommend scheduling on-site visits to your top charities and interviewing managers involved with the charity before making any significant gift. If time allows, volunteering is a great way to get to know the charity from the inside and to see firsthand how they run their business and whether they accomplish their stated goals. You might even ask your children and grandchildren to volunteer with you for a few hours to share in the health benefits of giving back and create lasting family memories. Community foundations are another good way to get connected to local charities as the staff can provide further details of charities working for causes you may want to support.
What to Give Considering Taxes? Donations to 501(c)(3) charities result in an itemized deduction, which reduces taxable income for taxpayers that itemize. The Tax Cuts and Jobs Act of 2017 increased the standard deduction to $12,200 for single filers and $24,400 (2019) for married filers which means about 60%[3] fewer taxpayers will itemize their tax deductions and therefore, will no longer benefit from the charitable tax deduction. For charitable donors, the best way to give might be to switch from giving annually to giving every few years. “Bunching” two or three years’ worth of charitable donations into one year might result in itemizing deductions in that year while taking advantage of the now higher standard deduction the other years (example of married filers in chart below). Cumulatively, this results in greater tax deductions which translates to tax savings. If you would like to bunch gifts for tax purposes but benefit the charity over time, consider using a donor advised fund (discussed below) which allows you to take the charitable deduction in the year of the gift, but allows you to make distributions to the charities over time.
Most gifts to qualified charities, except for the gift of time, qualify for a deduction for taxpayers that itemize. The most common gifts are cash or check, highly appreciated stock and personal property (including clothes, furniture, books, etc.). But other property such as highly appreciated real estate, cars, old life insurance policies and qualified direct distributions to charity from retirement plans make attractive giving options as well.
Long-term capital gain assets like highly appreciated real estate or company stock held for more than one year are great assets to donate because not only do you get the benefit of a charitable tax deduction, you also avoid paying tax on the capital gain – the difference between your cost basis and the current market value. Many business owners about to sell their company donate a portion of their company stock to charity before entering into a letter of intent about the potential sale. When structured properly, the business owner may take an income tax deduction [hopefully in the same calendar year when adjusted gross income (AGI) is high] of the fair market value of his or her company stock donated without having to pay tax on the capital gain. Note that if you give a large donation of long-term capital gain assets to qualified public charities, the amount of the income tax deduction is the fair market value of the asset but is limited to 30% of your AGI. A special election can be made for long-term capital gain assets that would allow you to deduct up to 50% of AGI however, it would be based on the adjusted cost basis of the asset donated. Any excess amount donated not currently deductible can be carried forward for up to five years.
For gifts of cash, inventory or short-term capital gain property to qualified public charities the amount of the deduction is the adjusted cost basis of the asset but is limited to 50% of your AGI (60% of your AGI for cash gifts). These limits are based on gifts to qualified public charities, some supporting organizations and private operating foundations.
If you have a life insurance policy that you no longer need, consider the leverage of donating it to charity. Life insurance policies are great to give because they do not affect your cash flow as an out of pocket expense, you get a current income tax deduction (assuming you itemize) and the eventual benefit to the charity is usually much greater than your previously incurred cost. A donation of a life insurance policy to a qualified public charity can yield a current income tax deduction of the adjusted basis in the policy, limited to 50% of AGI. In order to take advantage of the current income tax deduction, you must irrevocably assign all incidents of ownership to the charity. Donations to pay any future premiums should be made to the charity and are also income tax deductible (assuming you itemize). The donation of a life insurance policy to a charity should be carefully coordinated by your CPA, insurance company and charity to ensure the charity retains an insurable interest in the donor insured and the absolute assignment of all rights in the policy has been made[4].
Large donations to private charities, like private foundations or certain fraternal organizations, are subject to lower limitations. Specifically, for long-term capital gain property, the deduction is the fair market value of the assets donated limited to 20% of your AGI rather than 30%. For short-term capital gain property and cash the deduction is the adjusted cost basis on the assets donated limited to 30% of AGI rather than 50% or 60% for public charities. To determine the deductibility status of the charity you are considering donating to, visit the IRS website https://apps.irs.gov/app/eos/.
Have You Considered Alternate Ways of Giving? The simplest way to give to charity is by giving directly to the charity. However, putting thought into the way you give can create flexibility. To make a charitable donation with a lasting impact, consider using a donor advised fund (DAF). DAFs allow you to get a charitable tax deduction in the year you make the contribution, while allowing you to stretch the gifts to charities over your lifetime. From your DAF you have the flexibility to set up auto payments to your church or any qualified charity, or simply make a gift once a year. You can also give the joy of giving to others by allowing them to direct a donation to a charity of their choice from your DAF. DAFs are inexpensive to set up with a minimum initial contribution of typically $5,000. The contributions can be invested, so even a little can go a long way. Keep in mind, just like any charitable donation, there can be no quid pro quo (the donor cannot receive anything in return for the gifts) and a DAF cannot distribute to a charity to satisfy a personal pledge.
Charitable trusts are another way of giving, but are more complex and expensive to set up and maintain. Charitable remainder trusts provide an income stream to the donors for a set term of years or throughout their lifetimes and ultimately leave the remaining assets to a charity. A charitable lead trust pays income to a charity during the donor’s lifetime and the remaining assets are passed to the heirs of the donor. Charitable trusts are not as popular as they once were because there are significant costs to establish and maintain the trust, the tax law change in the late 1990’s requiring more be paid to the charity, and the recent period of low interest rates yielding minimal income to donors from a CRT.
Everyone Can Give Even if you don’t have highly appreciated stock or much cash to give, making simple gifts of time, old clothes, or weekly donations to your church will still go a long way. We encourage you to enjoy the gift of giving by incorporating philanthropy into your life.
Disclaimer: This article has been provided for informational purposes only and should not be considered as investment advice or as a recommendation. This material provides general information only. Beacon Pointe Advisors does not offer legal or tax advice. Private legal counsel alone may be responsible and relied upon for these purposes. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or matter.
[1] https://news.harvard.edu/gazette/story/2008/04/money-spent-on-others-can-buy-happiness/
[2] http://www.sciencedirect.com/science/article/pii/S0167876006001917
[3] https://taxfoundation.org/90-percent-taxpayers-projected-tcja-expanded-standard-deduction/
[4] http://www.pgdc.com/pgdc/life-insurance-charitable-planning-tool-part-i