As Worth magazine celebrates the men and women who have set out to change their communities and the world for the better, it is fitting to consider one of the most effective and dynamic tools these individuals have to achieve their goals: charitable giving.
Many financially successful individuals help their communities as a way to give back or “pay it forward.” For most, the incentive is a desire to truly help others. For some, it is a way to establish their legacy. Either way, charitable giving has the extra benefit of mitigating their tax burden. Here, we’ll focus on the tax aspects of charitable giving.
The first step is to focus one’s giving on a philanthropic objective. There is usually a choice of public charities that support the same goal. The key is to find the one most closely aligned with the intended objective.
Some charities have a hyper-local focus, while others are statewide, national or even global in their reach. Web research tools can help identify and evaluate worthy public charities’ effectiveness at achieving a specific charitable goal or mission.
From there, the next step is to decide how best to support the charity. Cash donations are the most straightforward and easiest to substantiate. To properly substantiate the gift for tax purposes, obtain a charitable acknowledgement letter for gifts of $250 or more. An alternative but even more effective method of giving is gifting a marketable security, such as publicly traded stock that has appreciated in value, as long as the security has been owned by the individual for more than a year.
Charitable giving can be a valuable strategy for reducing income taxes triggered by a one-time transaction, such as the sale of a business. Subject to income limitations, these gifts provide a deduction equal to fair market value, and since the asset has not been sold, income tax on the appreciation is avoided. This becomes even more valuable for those subject to the 3.8 percent net investment income tax. Consulting your advisor to discuss your charitable goals can save you thousands of dollars in income tax annually.
While donating appreciated stock can be highly effective, it is wise to avoid donating any stock positions that are currently worth less than what was paid for them. In that case, the best practice is to sell the stock to claim the loss and then donate the cash proceeds.
Charitable giving can be a valuable strategy for reducing income taxes triggered by a one-time transaction, such as the sale of a business.
Private foundations are typically corporations formed under a not-for-profit state statute and required to operate for specific purposes, such as religious, charitable, scientific, literary or educational ones.
Here, a current charitable donation deduction is available, of up to 30 percent adjusted gross income for cash donations or 20 percent for appreciated marketable securities held more than one year. The foundation is obligated to support public charities, but it may spread out donations over future years.
An alternative to a private foundation is a donation to a donor-advised fund. These funds are run by investment firms or large public charities and allow the donor to influence the use of the donation and investment choices for the fund. It goes without saying: Charitable giving has rewards beyond the tax benefit, and should be considered an integral part of year-end planning. Discussing the options with your advisor will help you maximize the tax benefits of charitable giving.
This article is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. To the extent anything herein could be construed as tax advice, such advice is not intended to be used and cannot be used to avoid penalties under the Internal Revenue Code, or to promote, market or recommend to another person any tax-related matter. This information is general in nature and may be affected by changes in law or in the interpretation of such laws. The reader is advised to contact a professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.