Making the most of your charitable giving

Supporting a charitable organization can be a rewarding experience in more ways than one: Not only does it offer the sense of personal satisfaction that comes with helping others, it can also offer tax advantages for you and your heirs.

To encourage philanthropy, the IRS currently offers several tax incentives to help make the most of every dollar you contribute to a worthy cause. It’s a win-win proposition for you, your heirs and the qualified charitable organizations you support.

However, the tax laws which govern charitable contributions in the United States can be complex. Tax obligations are influenced by your personal tax situation, the type of assets you donate, how the gift is structured, the type of charity you support and a few other variables.

Deciding how much to give and which charities to support

Below are the key questions people should ask themselves as they begin to create a charitable giving plan. While answers vary greatly depending on each person’s unique preferences and situation, several key considerations come into play:

• What are my specific charitable goals and values?
• How involved would I like to be in seeing those goals fulfilled?
• Do I intend to give during my lifetime, leave assets to charity at my death, or both?
• What are my wealth transfer goals for future generations?
• Will my estate be subject to the federal or state estate tax at death?
• How do I mitigate the income tax effects from the sale of a property or other significant receipt of income?

Charitable giving strategies can range from simple, one-time contributions to complex, multi-generational plans.

Although many people include bequests in their wills or revocable trusts, giving directly to charity during your lifetime has many gratifying aspects as well. And, as a bonus, it can also provide more tax benefits. Here are a few giving strategies to consider:

1. Give cash outright

Consider if you:

• Want a quick and convenient way to donate
• Are in a high-income tax bracket

For many individuals, a lifetime of charitable giving begins with simple outright cash gifts.

Making a cash contribution is the most straightforward way to support a charity, and to qualify for tax benefits in the year you make the donation. If you itemize deductions, your charitable contributions can offset your income for the year, including ordinary income and capital gains. Generally, you can deduct up to 60% of your adjusted gross income (AGI) for cash donations to public charities and 30% of your AGI for contributions to private foundations. Donation amounts above these limits may be carried over for up to five tax years.

In 2024, you can deduct charitable contributions only if you itemize deductions on Schedule A of IRS form 1040. Plus, according to the IRS, you can deduct contributions of $250 or more only if you have written acknowledgement from the charitable organization. Be sure to keep a record of your contributions and provide them to your accountant at tax time.

Similarly, if your estate may be subject to federal or state estate tax at death, the gift helps to reduce the value of your estate and may save taxes at your death as well.

2. Donate appreciated assets instead of cash

Consider if you:

• Have appreciated assets held for more than a year
• Want to avoid capital gains taxes on assets you otherwise may sell

If you have significant unrealized gains in your investment portfolio or other appreciated assets such as real estate, consider gifting these assets to charity rather than donating cash. This approach can result in a much larger benefit than selling the assets and donating the proceeds.

In general, you can claim the full fair market value of the donated asset as an income tax deduction (up to 30% of your AGI for assets donated to public charities and 20% for assets donated to private foundations), even if the initial cost of the asset was much lower. And you can avoid capital gains tax that would otherwise have been due if you sold the asset. The charity is not subject to tax, so it can sell the assets and receive 100% of the value.

Appreciated assets may include stocks, bonds, mutual fund shares, certain life insurance policies, and more. Under some circumstances, you may also donate more complex assets such as securities that are not publicly traded, restricted stock, shares of privately owned businesses and real estate.

You can carry over contributions that exceed your AGI limits and deduct the excess in each of the next five years.

A note about special rules for donating tangible personal property: If you are donating tangible personal property such as artwork or other collectibles, you will need an independent appraisal of any gift valued at more than $5,000 and, as required for any non-cash gifts over $500, you will be required to file IRS Form 8283 with your tax return. For artwork valued at $50,000 or more, consider asking the IRS for a Statement of Value before making the claim.

3. Transfer retirement account distributions directly to charity

Consider if you:

• Are required to take IRA distributions
• Do not need the distributions and want to eliminate the income taxes from the distributions

If you are required to take a minimum distribution from an Individual Retirement Account (IRA), you can consider transferring up to $100,000 per year directly to charities through a “Qualified Charitable Distribution” (QCD).

To make a QCD, ask your IRA custodian to send your distribution directly to the charity of your choice.

While no tax deduction is allowed, the distribution may be used to satisfy all or a portion of your IRA distribution requirement. Furthermore, you will not pay federal income tax on the distributions. Charities do not pay federal income taxes either. Therefore, they receive 100% of the assets transferred in a QCD.

Please note, if you are 72 or older and make a deductible, traditional IRA contribution, any subsequent QCD (up to the amount of the deductible contribution) will be taxable.

4. Use a Donor Advised Fund

Consider if you:

• Want to reduce the tax burden of unusually high taxable income in a given year
• Want an easy-to-setup and convenient, low-cost giving vehicle
• Want additional time to consider which organizations or charitable goals to support

Donor Advised Funds (DAFs) allow you to put money aside for charity today and distribute it to charitable organizations sometime in the future. This approach offers immediate tax benefits while you decide which organizations you will eventually support. A DAF is a particularly attractive option to consider in a year when you have realized a large amount of capital gains or have significant additional income. You'll get an immediate tax deduction for your gift and have more time to select a specific charitable organization while assets grow in the fund.

Most DAFs will provide the following features:

• Donate cash, appreciated assets, or sometimes illiquid assets
• Minimal cost and time commitment to open the account
• Relatively low initial contribution minimum
• Receive an immediate federal income tax deduction with each contribution to the fund
• No capital gains tax on the appreciated value of securities contributed
• Assets grow tax free
• Streamlined grantmaking to 501(c)(3) public charities
• Family members can be added as current or future advisors to the fund

5. Designate a charity as the beneficiary of your retirement account assets

Consider if You:

• Intend to leave funds to charity at your death
• Have retirement assets
• Want to minimize income taxes imposed on both your heirs and your estate

If you plan to leave money to charity as part of your estate plan, it is almost always better for your heirs if you use your retirement assets to fulfill the gifts before gifting your non-retirement assets.

The contributions you make to a qualified retirement plan such as an IRA or 401(k) are tax-deferred, so your heirs will typically pay income taxes on any money they withdraw from the account after they inherit it from you.

Likewise, if your estate is valued above the estate tax exemption amount, these assets may only reach your beneficiaries after being subject to estate tax. Ultimately, this means your heirs may receive less than 50 cents on the dollar from your retirement accounts, depending on their tax brackets and your estate tax situation.

In stark contrast, a charity is not subject to income or estate tax and will receive 100% of the retirement assets.

6. Establish a Charitable Remainder Trust

Consider if you:

• Would like to retain a stream of income from your donation
• Own assets that have appreciated significantly and you are planning to sell
• Are comfortable with an irrevocable trust

Charitable Remainder Trusts (CRTs) allow you to give funds to charity while retaining a stream of income for yourself or other individual beneficiaries—potentially for the rest of your or their lifetimes. At the end of the trust term the remaining assets go to charities you designate.

Contributions to CRTs can qualify for an income tax deduction based on the current value of the remainder interest going to charity.

Although irrevocable, CRTs offer flexibility: You decide how the trust is designed, including the payout rate and the lifespan of the trust (subject to IRS limits) as well as the ultimate charitable beneficiaries. You can also reserve the right to change the charitable beneficiaries down the road.

7. Establish a Charitable Lead Trust

Consider if you:

• Want to support a charity now and leave remaining assets to heirs
• Do not need an additional income stream
• Are subject to federal estate tax or have appreciating assets
• Are comfortable with an irrevocable trust

A Charitable Lead Trust (CLT) is often considered the opposite of a CRT because the specified charity receives the initial stream of income, while your heirs receive the amount that is left at the end of the trust’s term. It can be created during your lifetime or as part of an estate plan.

CLTs can be structured to provide the donor with an up-front charitable deduction as well as attractive gift and estate tax benefits: Any appreciation of assets above the IRS’s assumed rate of return will be considered a tax-free gift to your heirs and not subject to federal estate taxes.

8. Create a private foundation

Consider if you:

• Are interested in establishing a longer-term legacy of charitable giving
• Want direct family involvement in the grant-making process
• Are subject to federal estate tax
• Are comfortable with start-up costs and ongoing administrative, compliance and legal fees

A private foundation is a powerful tool to convert your family’s values into financial and institutional support for your charitable goals. Private foundations can bring a family together around meaningful goals and shared values, while creating a lasting legacy

If you are prepared to create and operate your own charitable entity, your foundation can create a more visible platform for your grantmaking. It can also be a means to bring your family and others together around selecting grant recipients to crafting and overseeing the operations of the organization.

Unlike gifts to a DAF or other public charities, gifts to private foundations are subject to lower income tax deduction limits (up to 30% of AGI for cash and 20% of AGI for appreciated securities). However, the assets held in a private foundation are typically intended to grow tax-free for years to come. Foundations pay an excise tax of 1.39% on their net investment income.

Private foundations also are required to distribute 5% of the foundation’s assets each, and are subject to strict rules related to self-dealing, jeopardizing investments and excessive business holdings.

Regardless of which charitable giving strategy or strategies you are considering, we recommend speaking with our team of specialized experts who can guide you and your family in supporting the charitable causes you care about most, while also offering guidance on the most tax-efficient way of supporting those organizations.

Next steps:

• Find more insights from our wealth planning experts
• Need guidance? Speak to an advisor today

This communication is intended solely to provide general information. The information and opinions stated?may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process.?Historical performance does not guarantee future results and results may differ over future time periods. IRS Circular 230 Notice:?Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

View our terms and conditions at https://www.fiduciarytrust.com/disclosure