Most people give to charity by writing a check. But gifts such as stock or retirement savings can sometimes do more good for the charity than cash, and cost you less in taxes. The best choice depends on your finances and goals and what the charity can accept. Here is a look at three common ways to give.
Cash
Writing a check to your favorite charity is the fastest and easiest way to make a difference. However, not every dollar you give may count as a charitable gift for tax purposes. In some instances, you may be writing a check as part of your weekly donation to a church, in which case you can count the entire amount as a donation to the church. On the other hand, you may choose to attend a dinner sponsored by a charity, and in that case, only the portion of the ticket price that exceeds the fair market value of the benefit you received (i.e., the cost of the dinner) is deductible. In these circumstances, the amount that you paid to attend the dinner must be reduced by the value of that benefit. Many tax-exempt organizations that host these types of events print both the cost of attendance and the deductible portion on tickets or in advertising.
In many cases, you may be able to deduct the gift on your income tax return for the year you made it. How this deduction is reflected on your income tax return will depend on the type and amount of the donation. There is also a yearly limit on how much you can deduct. The limits can change, so check the current rules with your tax advisor or us.
Appreciated Property
Appreciated property is property that is worth more today than what you paid for it, such as stock or real estate. Giving it directly to charity can help in three ways:
- You may avoid capital gains tax. Capital gains tax is the tax you pay on the profit when you sell something for more than you paid for it. If you sell stock and then give the cash to a charity, you must pay capital gains tax on the profit. However, if you transfer the stock to the charity and the charity sells it, the charity generally owes no tax on the profit because most charities are tax-exempt (they do not pay income tax).
- The charity may receive more. Because no tax is withheld from the gift, the charity keeps the full value of the donation.
- You may get a tax deduction. If you owned the stock for more than one year (long-term), you may be able to deduct its fair market value (what it would sell for today). If you owned the stock for less than a year, your deduction is generally limited to its cost basis (what you originally paid). As with cash gifts, there is a yearly limit based on a percentage of your income. For some gifts, the limit may be lower than it is for cash gifts.
This kind of gift may reduce your taxes, but check with the charity first. Some small organizations may not have an efficient way to accept, manage, or sell stocks and real property and would prefer a cash donation.
Retirement Accounts
There are two ways to give from a retirement account: while you are alive or after you die.
- Giving while you are alive. Once you reach a certain age, you may be able to make a qualified charitable distribution (QCD). This means money moves directly from your retirement account to a charity, and you do not pay income tax on it. Once you reach a certain age, the government requires you to take a minimum amount, called the required minimum distribution (RMD), out of your retirement account each year. Normally, you pay income tax on that money. If you do not need the money from your retirement account, a QCD can help you in three ways: 1) it counts toward your RMD, 2) it supports a charity you care about, and 3) it keeps that money out of your taxable income. Keep in mind that, because the QCD is not included in your taxable income, you cannot take an itemized tax deduction for it.
- Giving after you die. You can also name a charity as a beneficiary of your retirement account. Money taken out of an inherited retirement account is usually taxed as income to the individual beneficiary. If a charity is the beneficiary, it does not pay income tax, so it can keep more of the gift. For that reason, retirement accounts are often a good asset to leave to charity, while other assets may be better to leave to loved ones.
Regardless of which method you choose, your charitable donation may reduce your estate tax liability if you own enough money and property at your death to require an estate tax to be assessed. Because all of these donations rely on your giving something to the charity, you no longer own it, and therefore it will not be a part of your estate at your death.
Not Sure Which Gift Fits? Let’s Talk
Giving to your favorite charity is not only beneficial to society but also has some potential tax benefits for you and your loved ones. With many options available, we are here to assist you and your financial team in developing a strategy that benefits all parties involved. Call us today to discuss your charitable goals and set you on the path to leaving a lasting legacy.