Since it is the giving season, let’s talk about charitable giving! You are not limited to donating cash to a public charity. Certain accounts or pieces of property may be better suited for donation to the charity.
Cash. Writing a check to your favorite charity is the fastest and easiest way to make a financial impact. 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. In that case, only a portion of the purchase price will be eligible for the income tax deduction. Whether it is the entire donation or a portion, the amount can be deducted from your income tax for the year the gift was made. The total amount that can be deducted for most cash donations to a charity is limited to 60% of your adjusted gross income.
Appreciated Property. One benefit of donating appreciated property (such as publicly traded stocks or real estate) to a charity is avoiding the capital gains tax that would otherwise be due upon its sale. If you were to sell the stock or real estate and give the cash to a charity, you would first be required to pay capital gains tax on any increase in its value from when you purchased it to when it was sold. However, if you donate the property to the charity and the charity makes the sale, it will not be required to pay tax on the capital gain. When making a gift of appreciated stock or real estate that you have owned for more than one year, you can receive an income tax deduction in the year it was donated equal to its fair market value. Be aware that the limit for donating appreciated property to charities is 30% of your adjusted gross income.
While this option is a great way to reduce your taxes, it is important to research to ensure that the charity you want to donate to accepts these types of donations. Some small organizations may need an efficient way of investing, managing, or selling appreciated property and would prefer a cash donation.
Retirement Accounts. If you are currently 72 years old or older and want to donate money to a charity, you can make a qualified charitable distribution from your account to the charity and avoid paying income tax on the distribution. If you take the required minimum distribution (RMD) and then donate the money to a charity, you will be required to pay income tax on the RMD. If you do not need the RMD, a qualified charitable distribution makes sense, as it will satisfy the requirement that you take the annual distribution (if you are required to take it), allow you to support the charity, and enable you to avoid paying income tax on that distribution. However, it is essential to note that a qualified charitable distribution does not qualify for an income tax deduction because the distribution is not included on your income tax return as income to be taxed.
Another way you can donate your retirement account is to name the charity as a beneficiary so that the retirement account is given to it after you die. Regardless of who receives distributions, whether you (the owner) or a person you designate as a beneficiary, each distribution is subject to income tax. By donating the retirement account to a charity, it can use the money without incurring income tax liability. Since the charity will not have to pay income tax on the distributions from the inherited retirement account, it will receive a larger benefit from the account than an individual would.
We Are Here to Help. Giving to your favorite charity is beneficial for society and has some potential tax benefits for you as the donor. With many options available, we are here to assist you and your financial team in developing a strategy that will be beneficial for all parties involved. Give us a call today so we can discuss your charitable goals and get you on the path to leaving a lasting legacy.