By: Investor Solutions, Inc.
It feels good to give. It feels even better when that giving helps your wallet too. As the end of the tax year approaches, it may be time to start thinking of ways to reduce your tax bill for next spring. Charitable gifting is one of the best ways to accomplish this.
Philanthropy through charitable contributions generates not only goodwill, but also has significant income and estate tax benefits for donors. For wealthy individuals, this may translate into hundreds of thousands of dollars in estate and income tax savings.
There are many ways to give. And depending on the complexity of your estate, gifting strategies can range from a simple outright gift, to more elaborate planning through trusts and private foundations. In this series of articles, we will explore the various alternatives and implications of gifting strategies.
Perhaps the most effortless method of charitable gifting is through an outright gift. During one’s lifetime, writing a check, assigning a stock, or deeding property can accomplish this. At death, outright gifts can be made by will, life insurance, trust, or pension benefits. For purposes of this article, we will discuss only lifetime contributions.
What Constitutes A Charitable Contribution?
A charitable contribution is a gratuitous, completed transfer of property to a charitable, religious, scientific, educational or other specified organization. Depending on what category the donee falls under, a charitable deduction may be taken for income, gift or estate tax purposes.
For tax purposes, not all gifts are created equal, so if you-re looking for a break from Uncle Sam, do your homework. Contributions are only deductible if made to a “qualified” charity. “Qualified” organizations must be operated exclusively for religious, charitable, scientific, literary or educational purposes; or to foster national amateur sports competition, or to prevent cruelty to children or animals.
Some examples of qualified charitable organizations:
- Churches or synagogues
- Most nonprofit organizations (such as Salvation Army, Red Cross, Goodwill Industries, United Way)
- Nonprofit hospitals and medical research
- Most nonprofit educational organizations (such as Junior Achievement)
- Nonprofit volunteer fire departments
- Public parks and recreation facilities
- War veterans groups
Contributions that do not qualify for a deduction:
- Contributions to political groups
- Gifts to individuals
- “For profit” organizations
- Donations to civic leagues and social clubs
What Constitutes A “Completed Transfer”?
In order to qualify as a completed gift, delivery of the property or cash must have taken place. The gifted property must be accepted by donee. And the donor must give up control and title of said gift.
Are There Any Dollar Limits?
You can make gifts to qualified charities — regardless of amount — without any Gift Tax. The amount deductible, however, is dependent on the type of charity it is. (Described below)
Conversely, gifts to individuals have an $11,000 annual cap ($22,000 for a married couple who elect to split the gift) per donee, free of gift tax but do not qualify for a deduction.
The individuals can be your family members (for example, you can make such gifts to each of your children and each of their spouses and each of your grandchildren and each of their spouses, to parents and grandparents, to uncles, nieces and nephews, etc.) or to friends, or to any other category of individual you select, regardless of their citizenship. And while they do not qualify for income tax deductions, they may be an effective way to move assets out of your estate, reducing your estate tax exposure.
How Much Is Deductible?
The amount of your deduction to a qualified charity may be limited to either 20%, 30%, or 50% of your adjusted gross income (AGI), depending on the type of property you give and the type of organization you give it to.
Generally, contributions to public charities are more favorable than private foundations. Cash gifts to public charities are fully deductible up to 50% of a donor’s contribution. While cash gifts to nonpublic (private) charities, regardless of the type of property given away, is limited to the lesser of 30% of the taxpayers adjusted gross income or 50% of AGI minus amount of charitable contribution deductions allowed to a public charity.
Example: Bill Gates donates 40% of his AGI to a public charity like the United Way, his contribution to a (30%) private charity are only deductible up to 10% of his AGI. Or, 40% AGI minus 30% equal 10% deductible contribution.
A gift of capital gain property to private foundations is the lesser of 20% or the unused portion of the 30% limitation.
What Are My Tax Savings?
A donor in the 38% tax bracket contributes $10,000. The tax savings are:
Tax Savings = Amount of deductible gift X effective tax bracket
$3,800 = $10,000 X 38%
Therefore the net out of pocket expense for the gift was only $6,200!
By far, this is the simplest and quickest way to spread your wealth and accomplish your altruistic goals. For individuals with larger estates or an array of assets, or for those who yearn for a more systematic way of giving, there are alternatives. Coming up, we will explore the concept of charitable trusts