It is no surprise that a third of all charitable contributions for the year will be made this month. It may be because the holidays bring out the best in mankind or that charitable giving is a way to reduce your tax liability for the year.
If you itemize deductions on your income tax return, you can generally deduct gifts to qualified charities. A qualified charity is a 501(c)(3) organization, which allows for federal tax exemption for the organization and tax deductibility of donations. When making charitable contributions for tax deductions, be aware that not all donations are treated the same. A donation to a public charity generally allows you to take a charitable deduction up to 50% of your adjusted gross income (AGI); however, donations to private foundations allow for a charitable deduction up to 20% or 30% of your AGI.
While you can make outright gifts to a charity at any time, if you are interested in a lifetime of philanthropy and leaving a legacy after you are gone, you may consider charitable trusts, family foundations or donor advised funds. A charitable remainder trust allows you to provide for your family while funding a charitable organization. Assets are moved from your estate into the trust. A designated trustee is responsible for the management of the assets. A portion of the income produced by the trust is paid to the non-charitable beneficiary for a specified period outlined in the trust documents. The charity’s rights to the assets is generally delayed until the non-charitable beneficiary has received their portion of the income generated from the trust’s assets.
A private foundation, or a family foundation, is a tax-exempt legal entity created, funded and operated by a high-net worth family or business. Donors have complete control over how contributions are invested and how grants are made. Foundations are considered “non-operational” when their main effort is focused on giving grants, or “operational” when they mainly run charitable programs. This distinction is important, as it affects the deductibility of contributions. Cash donations to a non-operational private foundation are deductible up to 30% of the donor’s AGI, while gifts of appreciated stock and real estate may be deductible up to 20% of AGI. Gifts to operating private foundations are deductible up to 50% of AGI for cash and up to 30% of a donor’s AGI for appreciated stocks.
Donor-advised funds are private funds administered by a community foundation or third-party financial institution that manages charitable donations for a number of unrelated contributors. Donor-advised funds are ideal for charitable stock donations because assets can be transferred relatively quickly with an immediate effect for tax planning purposes. Assets are considered immediately removed from the donor’s estate, but grants from the donor-advised fund do not have to be instantaneous. Benefactors can make recommendations to the fund regarding the grants the fund makes to charities. Most donor-advised funds will follow a donor’s wishes as to when, how much, and to which charities grants are given.
Like other charitable donations, gifts to a donor-advised fund are considered donations to a public charity for tax purposes, which means the donor is allowed to take an immediate income tax deduction of up to 50% of AGI for gifts of cash and 30% for gifts of long-term capital gain property. Investment growth of the funds in a donor-advised fund are not eligible for a charitable deduction.
Regardless of how you give, you’ll want to work closely with your tax adviser to make sure you take the correct deduction and have the proper documentation needed to substantiate your deduction. If you have questions regarding charitable giving, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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