What To Know About Charitable Giving
In general, explains the IRS, contributions to charitable organizations may be deducted up to 50 percent of adjusted gross income. Contributions to certain private foundations, veterans organizations, fraternal societies, and cemetery organizations are limited to 30 percent adjusted gross income, however. Yes, this can get complicated, so be sure to keep records and discuss the tax situations with a professional, as there are further details.
Think out of the box
According to the IRS, qualified individuals can donate up to $108,000 directly into one or more charitable organizations from their taxable IRA account. The amount increases to $216,000 for married couples. The money never passes into the hands of the IRA owner — it is deposited either electronically or through a check into the qualified charity.
Many times, an RMD will push the taxpayer into a higher tax bracket. Rolling over an RMD into a QCD has a tax advantage for the donor. QCDs reduce the balance of the IRA, which may reduce the amount of the RMD for future years. Note that QCDs are not counted toward the maximum amounts deductible for those who itemize their donations on their taxes.
If you do itemize your charitable giving, the $108,000 can be above the limits. Donating in this way gives you more of a reason to use your RMD instead of using cash or some other assets. The value of charitable donations that can be deducted from a tax return usually ranges from 20% to 60% of the donor's adjusted gross income. QCDs allow the donor to make larger donations, as they are not limited by their AGI.
What about trusts?
A charitable trust is one way to fulfill your philanthropic goals; it comes with benefits like income tax deductions for fair market value of the donated assets, a potential reduction in real estate taxes and the avoidance of capital gains taxes on appreciated assets. Charitable trusts are one way to create a family legacy of giving as part of savvy tax planning within your estate plan.
There are two kinds of charitable trusts:
Charitable remainder trusts — In these, the donor or other designated individual(s) receive income from the trust either for their lifetime(s) or for a period of up to 20 years, after which the remaining assets go to the designated charity.
Charitable lead trusts — These offer the income to the charity for a set period and the remaining assets then pass to your beneficiaries.
Both of these are also known more broadly as split interest trusts because they split payments between the donor and a noncharitable beneficiary. Speak with a professional about how to set these up.
Consider long-term planning
A bequest in your will or revocable trust allows you to leave a specific amount, percentage or asset to a charity. This approach is simple and flexible and qualifies for an estate tax deduction. Naming a charity as a beneficiary of your retirement accounts — such as your traditional IRA or 401(k) — can also be tax-efficient as charities do not pay income tax on distributions.
Another option is donating appreciated stock directly to a charity. If you sell the stock yourself, you may owe capital gains tax. However, if you donate the stock to a nonprofit, you will be able to claim a tax deduction for its full market value while avoiding capital gains tax. The charity can then use its tax-exempt status to sell the stock without incurring capital gains tax.
If you would like to provide income for your heirs before benefiting a charity, a charitable remainder trust allows selected beneficiaries to receive payments for a specified period, after which the remaining assets transfer to the charity. This can be an effective way to balance financial support for loved ones with charitable intentions.
No matter what you do, a yearend plan is great to help you address your charitable goals, and a financial professional can help you.
