What is charitable giving exactly?
Charitable giving is a charitable donation usually to a non-profit organization. Helping others feels good, but not everyone knows that helping others also helps yourself. When you get to tax season, you will see your generosity rewarded. Charitable donations play a valuable role in your financial and tax strategies. A well-planned gift to a charity could provide an income tax deduction. It can possibly reduce your estate taxes too. Your donation can also help you maintain financial security, exercise control over assets both during your lifetime and after death. Lastly,provide for your heirs in the manner you choose. Wow that’s a lot of stuff!
To accomplish all of these objectives, you need to develop a plan tailored to your individual circumstances. While you should always consult your financial team about any large charitable donations, this post will give you enough information to approach the conversation with your own ideas.
Where to begin?
When planned properly, gifts of appreciated property to charity may allow you to avoid the capital gains tax you would have owed when the asset was sold. Gifts of property are also often quite sought after. From small items that you drop off at Goodwill or furniture you deliver to a homeless shelter, these donations are always beneficial for the recipients. This charitable donation may also allow you to receive an income tax deduction, usually worth the fair market value (FMV) of the property. This is great for you because you help others in need, while saving yourself money. Also, by removing that asset from your estate, you may reduce your potential estate tax burden.
Charitable Donation Trusts- Not only for Rich People
Charitable remainder trust (CRT)
If you want to make a gift of property to a charity but also retain some control over it, a charitable remainder trust (CRT) may be the right option. A CRT is effective when funded by an appreciating asset, such as real estate or stock in a family-owned business. After the property is transferred to the trust, it continues to provide income for a period of time, after which the remainder of the trust is donated to the charity (this is used frequently with college donations). You avoid capital gain taxes on the assets you donate, and you receive a tax deduction on any interest earned by the remainder. Also, by removing the remaining value of the asset from your estate, you reduce your potential estate tax liability. In short, you obtain the tax benefits of giving while postponing receipt of the gift by the charity. Make sure that if you do decide to use this type of trust you include legal counsel in the conversation.
Charitable lead trust (CLT)
If you wish to give to a charity without giving an asset away permanently, consider a charitable lead trust (CLT). Through a CLT, you essentially give the charity the use of an asset and the right to any income generated for a predetermined time. After the specified time has lapsed, the asset can revert to you or be given to whomever you choose. Appropriate charitable donations might be income-producing stocks and bonds, your rare book collection, or a painting that you transfer to a museum for a certain length of time. You may receive a current income tax deduction for the value given to charity; however, the trust pays income tax on its income. If a CLT is created upon your death, estate tax liability may be reduced.
Bottom Line
No gift is too small or too large to effectively help someone in need and assist you during your tax season as well. It’s all about helping others, and we are lucky enough to live in a country that returns the favor. Early tax planning can help you make the most of your charitable donations. Be sure to consult me as well as your team of qualified tax, legal, and financial professionals for specific guidance.
