Money Matters/How to give (to a charity) and receive (a tax break)
The saying goes it is better to give then to receive. Wouldn't it be better yet if you could do both? Well you can when you give to a charity. You can give a donation and at the same time receive a tax deduction.
For a clearer picture of the tax ramifications of your prospective good deed, let's look at the "when" and "what" of charitable giving.
Assessing your options
The first major factor to consider is when to give. If you donate to charity through your will or living trust, your estate typically can claim a charitable deduction. If you donate during your lifetime, the donation's value is no longer a part of your estate, so the gift yields the same estate tax benefit as a bequest. But in addition, gifts to qualified charities made during your lifetime entitle you to a charitable deduction for income tax purposes.
Be aware that your income tax deduction may be limited, based on your adjusted gross income (AGI), the type of asset you donate and the nature of the organization receiving the gift, among other factors. Charitable gifts that exceed the AGI limits generally can be carried forward for up to five years.
If you're concerned about your future financial needs, it might not be wise to make large gifts during your lifetime. Making charitable gifts through your will or living trust allows you to retain access to the assets during your lifetime, and the estate tax charitable deduction generally is unlimited. But you'll forgo an income tax deduction.
Alternatively, consider giving during your lifetime using a charitable remainder trust (CRT). A CRT allows you to make a gift today and receive an income tax deduction determined by the expected amount that will go to the charity in the future when the CRT terminates. You retain the right to a stream of payments from the trust, which may alleviate some financial concerns about making the gift.
Then there's the "what" of charitable giving. Typically, it's best to give long-term appreciated securities such as publicly-traded stock, mutual fund shares and closely held stock held more than one year because these donations may be more tax-efficient.
For example, if you sell stocks that have increased in value since you purchased them, you'll have to pay income tax on the capital gain -- even if you then donate the proceeds to charity. But you can avoid the capital gains tax if you donate the shares themselves to charity. Plus, the charity generally won't incur any tax if it sells the shares, though certain charities such as private foundations will be subject to a minimal tax.
You can deduct the shares' full fair market value on the day you make the transfer. If you donate closely-held stock, you may need to obtain a qualified business valuation. Beware, however, that donations of appreciated assets are subject to tighter AGI limits than other types of donations.
You may take advantage of this strategy even if you don't want to immediately dispose of your stock. How? Donate your appreciated stock to charity for the tax benefit and then buy back the same stock with other funds. When you later sell those shares, your tax basis will be higher than it would have been, reducing your capital gains tax.
Other types of gifts may include:
Retirement plan assets
Personal property such as automobiles, artwork and antiques
Be mindful that, if you're donating personal property, you can deduct only your cost basis and not the fair market value of the property unless the charity will use the property in connection with its stated mission.
If done wisely, charitable giving can be a great way to help your favorite charity and get a tax deduction.
This has been a general discussion of what can be a complex matter and is not intended as advice to anyone. Always consult your financial advisors before making charitable giving decisions.
Norm Grill is a certified public accountant and managing partner of Grill & Partners LLC, accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Greenwich. He can be reached at: n.grill@GRILL1.com