Year-End Strategies for Charitable Giving from a Financial Advisor

With these year-end giving strategies, you can make charitable donations in ways that are most beneficial to your financial situation.

Many people enjoy donating to charity, but they may not be aware of all the different ways they can donate. They may also not know that they can receive tax benefits from donating. With the Tax Cuts and Jobs Act, fewer people will itemize deductions. However, there are still ways to save on taxes through charitable donations.

Typically, people think of donating to charity by check or cash, but that is not always the most effective way to go about it. These five ways to give combine helping good causes with saving money through tax breaks.

1. Give securities rather than cash

If you've owned stocks, mutual funds, or bonds for over a year, donating them can save you more on income taxes than donating cash. Moreover, donating securities is convenient because all you need to do is transfer them—you should not sell the securities first in order to donate them.

Donating stocks instead of cash saves more on taxes because stocks given to a nonprofit do not have capital gains tax. For example, if you make a $10,000 cash donation, you could save $4,500 in taxes. If you donate $10,000 worth of stocks that have doubled in value, you could save $5,990 in taxes. This amount includes $1,490 saved in future capital gains taxes.

2. Donate an RMD tax-free to charity

If you are 73 years old or older, you can donate your required minimum distribution (RMD) to charity. This donation will not be counted towards your adjusted gross income. However, the money must be transferred straight from the IRA to the charity for it to be considered tax-free.

To get the tax-free benefit, you cannot first withdraw the RMD from the IRA and then donate it to charity. If you take money out of your IRA and then donate it to charity, you can still deduct the donation. However, the withdrawal will count as income, which is usually not as advantageous as donating directly from the IRA.

3. Utilize a charitable donation to balance the tax costs of converting a traditional IRA to a Roth IRA

A traditional IRA and a Roth IRA are different in one keyway. Contributions to a traditional IRA can lower your taxes for the year you make them. Additionally, the money in a traditional IRA can grow without being taxed while it stays in the account.

With a traditional IRA, you pay regular income tax on contributions and earnings when you withdraw money. You must also start taking minimum distributions from your account when you turn 73 or 75.

Roth IRA contributions aren't tax-deductible, but growth and withdrawals are tax-free.

Traditional IRAs allow you to save money without paying taxes upfront. Roth IRAs allow you to withdraw money in retirement without paying taxes. For both types of IRAs, you will not pay any taxes on the growth of the funds while they stay in the account.

Roth accounts are beneficial for people who think their tax rate is lower now than it will be in the future. They are also good for those considering estate planning and benefits for their heirs.

When you switch a traditional IRA to a Roth IRA, you must pay taxes on any money that was not taxed before. The amount you owe depends on your tax rate and how much you converted.

However, if you convert in a year when you can claim a large charitable tax deduction, the charitable deduction can help to offset the conversion taxes. Under these circumstances, giving to charity can be a great opportunity to both give back and reduce taxes.

4. Create a donor advised fund

A donor advised fund (DAF) allows you to give money to a sponsoring organization. You can get a tax deduction immediately. Later, you can decide how to distribute the money to your favorite charities at your own pace.

To start a donor advised fund, you need to make at least one donation of money or assets to the organization. You may then want to add to that fund in subsequent years.

Setting up a DAF is a good way to give to charity at the end of the year. You can get a tax deduction right away for your gift, and you can choose which charities to support later.

5. Create a charitable remainder trust

A CRT lets you turn money or property into income for life and gives you and your heirs a big tax benefit. You create a trust and give money or property to it to donate to an IRS-approved charity.

The charity will then serve as the trustee, and it is charged with managing and investing the trust funds. The charity pays you or someone you choose. This payment comes from the trust's income. It lasts for a specific number of years or for your entire life, as mentioned in the trust document.

You can choose to either receive fixed annuity payments or percentage payments from the trust. If you choose fixed annuity payments, you will get a specific amount of money from the trust each year. This amount does not change based on how well the trust's investments do. This type of trust is known as a charitable remainder annuity trust.

If you pick percentage payments, you will receive the same percentage share each year, no matter how much the trust gained or lost. This is called a charitable remainder unitrust. At the end of your payment period, any remaining property goes to the charity. This is why it is called a charitable "remainder" trust.

A charitable remainder trust provides you with tax savings in three main ways:

●      You can get a tax deduction for your charitable gift over several years. This deduction is reduced by any interest payments you expect to receive in return.

●      If you donate trust property to charity, you can receive a deduction on your estate tax. This is because the property is no longer considered part of your estate. As a result, it is not subject to federal estate tax.

●      A capital gains tax deduction, as a charitable trust enables the charity to turn property that isn’t producing income into cash without having to pay a tax on profits gained. For example, if John held 1,000 shares of a stock that had appreciated in value from $1 per share to $10 per share while he held it, he could not sell the stock without having to pay a capital gains tax on it. However, if John donates the stock to a charitable remainder trust, then the trust can sell the stock without having to pay a tax on the sale and pay John interest from this fund for the rest of his life without ever having to pay a capital gains tax.

Bottom Line

There are various ways to help others and gain tax benefits. A financial advisor or tax professional can assist you in finding the best options for your specific financial needs.

Sources:

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All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.

Advisory Services Network, LLC does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.