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Save income, gift and estate taxes—Give to charity!

By Cynthia Turoski, on November 8th, 2016

It won’t be long before that end-of-year crunch comes for making charitable contributions in time for a current year tax deduction. Have you evaluated the different strategies for those that best fit your situation and objectives? Consider these ways to fulfill your charitable goals:

Annual charitable gifts

  • Cash—Besides gifts by cash/check, a contribution charged on your credit card is deductible in the year charged, no matter when you pay your credit card bill (which, of course, we recommend you pay promptly). You could also benefit from earning additional travel miles, purchase credits, cash back, etc., if your credit card so provides.
  • Non-cash—Donations of clothing, household items, food, etc., are eligible for an income tax deduction. Rather than using the drop boxes, take a few more minutes to list out the items with price estimates (see the Salvation Army’s web site for a price guide), get the list stamped/signed by the charity and claim the deduction on your tax return. You may be surprised at how quickly those dollars add up to a meaningful tax deduction. We’ve seen those items add up to a few thousand dollars (good thing for proper substantiation!).
  • Appreciated stock held more than one year—Don’t sell the stock. Instead, contribute it in-kind to charity so you can claim a deduction for the full value without having to incur the capital gains tax.
  • Stock below cost—If the value of a stock is less than what you bought it for and it doesn’t make sense to hold onto it from an investment perspective, sell it to claim a capital loss, then contribute the cash.
  • Qualified Charitable Distribution from your IRA—If you are at least age 70.5, you can make distributions of up to $100,000 per year directly from your IRA or inherited IRA to charities. The charities must be public charities, not a donor-advised fund, private foundation, or charitable trusts. The distribution can also satisfy your annual required minimum distribution. Neither the distribution or the charitable contribution would be reportable on your tax return. This avoids inflating your AGI for other possible implications, such as phase-outs and taxation of your social security benefits. This makes sense if it’s money you can afford to gift to charity and want to.
  • Charitable lead trust—If you wish to make sizable annual gifts to charity and also wish to pass wealth to your heirs, why not coordinate those two goals into one strategy that saves you income and gift/estate taxes at the same time? You could pass wealth to your heirs through this kind of charitable trust that makes your usual annual charitable gifts. At the end of the trust term, the trust assets pass to your heirs. Since your heirs don’t receive the wealth for some time, it passes to them at a discount for gift/estate taxes. The annual gifts to charity serve as leverage to pass wealth to your heirs at a transfer tax discount. Such a deal! There are different ways to design these trusts to vary the income and estate tax treatment to best fit your situation.
  • Donor advised fund—A donor advised fund is a fund that a donor establishes with a community foundation or financial institution for making future gifts to charity in perpetuity. Each year, the fund makes annual gifts to charity (in someone’s name if you like). As the fund grows so can the charitable gifts. On creating the fund, the donor gets a current tax deduction. A donor could contribute appreciated assets to the fund without incurring any capital gains tax.

Deferred gift to charity

  • Charitable remainder trust – A charitable remainder trust (CRT) provides you and/or your spouse with an income stream (possibly for life) with the remainder passing to charity(s) at the end of the trust term. There are several types of CRTs to suit different needs. This technique allows you to:
    • Save income taxes via a charitable deduction
    • Turn an otherwise non-income producing asset (i.e. appreciated stock) into an income stream to help support your lifestyle
    • Diversify a portfolio without incurring an immediate capital gain

Gifts at death (hopefully qualifying as deferred giving)

The above strategies can also be used at death. However, rather than making gifts to charity at your death through your will, why not contribute to charity during your lifetime to allow for an income tax deduction? Gifts at death reduce your taxable estate, but don’t allow for an income tax deduction. Besides, why not give when you can be there to enjoy the joy of giving?

Please see your tax and financial advisor for advice pertinent to your personal circumstances. We would also be pleased to help coordinate your charitable gift planning with your overall estate and financial plan.

Cindi Turoski is a managing member of Bonadio Wealth Advisors based out of our Albany, NY office.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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