The American public
continues to be generous to their favorite causes. It is estimated that
over $335 billion was given to charities in 2013, according to the Giving
USA Foundation. Along with enabling their favorite charities to continue
their good works, many include charitable giving as part of their overall
income tax and tax planning strategy. This article identifies some of
the issues you may want to consider as you plan your charitable giving
activities. You should always make sure the charities you are considering
are legitimate and you should consult with your financial or tax advisor
to better understand how the tax laws apply to your situation.
Income Tax Deductions
If you itemize your deductions, contributions to qualified charitable
organizations can be claimed as deductions. There has been considerable
discussion as part of many tax law changes about enabling non-itemizers
to also get tax relief from charitable contributions. However, at this
time, only taxpayers claiming itemized deductions get this benefit.
The amount you can
deduct for charitable contributions is generally the fair market value
(FMV) of what you give. For cash contributions, it is simple. Your deduction
is just how much you gave. If you give other property (like stocks, real
estate, art or other items), determining fair market value can be more
difficult. For publicly traded securities, FMV is calculated as the average
of the high and low prices for that security on the date it was transferred
to the charity. For illiquid or non-publicly traded securities, you may
need to get an appraisal to determine the FMV. In addition, the property
(or securities) must have been held for more than a year.
Limits on Deductions
The tax laws do place some limits on the total amount of charitable contributions
that may be claimed on individual tax returns. For contributions of cash
to public charities (not private foundations), you may claim deductions
up to 50% of adjusted gross income. If appreciated securities are given,
there is a limitation of 30% of adjusted gross income. Deductions in excess
of these limitations can be carried forward and used over a five year
Why give appreciated
Donating stocks (or other securities) that have risen in value since they
were acquired offers two tax benefits. As long as you have held the securities
for more than a year, you can claim a deduction for the appreciated value
and you avoid paying tax on the capital gain. If you have held the stock
for less than a year, your deduction is limited to your cost basis. If
you donate a stock that has fallen in value, your deduction is limited
to the fair market value.
Consider the following:
You bought 100 shares
of XYZ stock several years ago for $25 per share and it has now risen
to $60 per share. In other words, your $2500 investment is now worth $6000
and you wish to give $6000 to your favorite charity.
If you donate the
shares to a charity, you get a deduction for $6000 and pay no income tax
on the gain. If you sell the shares, you would pay tax on the capital
gain of $3500 (probably 15% of $3500 or $525) leaving you only $5475 to
donate. By giving the shares you avoid the capital gains tax and the charity
gets the full $6000 value. The charity could then sell the shares and
have the proceeds to use.
There are more sophisticated trust strategies that some individuals use
- charitable remainder trusts and charitable lead trust. With a charitable
remainder trust, a donor contributes property (usually money, securities
or real estate) to a special form of trust. During the donor's lifetime
or some period, the income from that property is distributed to the donor.
On the donor's death or at the end of the specified period, the remainder
goes to the charity.
With a charitable
lead trust, the effect is the opposite. The charity gets the income
for the lifetime of the donor (or some period) and the remainder goes
to the donor's estate or some other beneficiary at the end. These types
of trust are complicated to set up and administer and are usually only
used as part of a sophisticated estate plan by wealthier individuals.
Qualified legal and tax assistance is a must.
vehicle that has become popular in the past few years is the donor advised
fund. These funds have been established by many mutual fund companies
and function like this:
-- A person donates cash or appreciated securities to the "donor
advised fund." Usually, these funds require a minimum of at least
$10,000. The contribution is irrevocable.
-- The donor gets a tax deduction for the contribution in the year it
-- The fund invests and manages the contribution along with the rest of
the moneys within the fund.
-- The donor recommends which charities are to receive the contributions.
-- The "donor advised fund" evaluates the recommendation and
makes the contribution.
The benefits of this
approach include the ability to get an immediate deduction while the contributions
are made later. In addition, the fund professionally manages the moneys
and handles much of the paperwork. Be sure to thoroughly investigate any
organization offering donor advised funds before enrolling.
Charitable contributions enable many worthwhile organizations to carry
out their missions. Donors can get emotional satisfaction and tax benefits
through their giving. The tax laws are structured to encourage giving
and there are ways to maximize the tax benefits of giving. Using some
of the more sophisticated ways of giving can get complicated and is always
advisable to use professional help in evaluating them.