Doing Good: In Spirit and with Your Wallet

by: Smith and Howard

December 16, 2016

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The holiday season always seems to open people’s hearts (and wallets). Giving to a charity is not only generous and needed, but can bring significant tax deductions. Charitable giving is known as one of the most flexible tax planning tools because your choice of recipients is vast and you can give at any time of the year (although deductions are based on IRS deadlines). To take a charitable donation deduction, the gift must be made by Dec. 31, 2016. Don’t give and go. As a donor, make sure you are taking advantage of the available tax planning strategies.

Cash Donations

Cash donations, which include donations made via check, credit card and payroll deduction, are the easiest type of donation. However, it is important to substantiate them if you wish to use them as a deduction.  To be deductible, cash donations must be:

  • Supported by a canceled check, credit card receipt or written communication from the charity if they are under $250, or
  • Substantiated by the charity if they are $250 or more.

Please note that deductions for cash donations to public charities cannot exceed 50% of your adjusted gross income (AGI). The AGI limit is 30% for cash donations to nonoperating private foundations.  Contributions that exceed the AGI limit can be carried forward for up to five years.

Donor-Advised Funds

Donor-advised funds (DAF) are becoming increasingly popular. A DAF allows the donor to front-load giving, putting a lump sum into the Fund at once and distributing it over time to one or multiple charitable organizations. Money in the DAF is invested under the direction of the client (you) or appointed financial advisor. When an individual wishes to give to a charitable donation, he recommends the donation to the DAF.

Please be aware that to deduct your DAF contribution, you must obtain a written acknowledgment from the sponsoring organization that it has exclusive legal control over the assets contributed. Visit Smith and Howard Wealth Management to learn more.

Charitable Remainder Trusts

To benefit your financial future while contributing to charitable causes, you might consider a charitable remainder trust (CRT):

  • For a given term, the CRT pays an amount to you annually (some of which generally is taxable)
  • At the term’s end, the CRT’s remaining assets pass to one or more charities
  • When you fund the CRT, you receive an income tax deduction for the present value of the amount that will go to charity
  • The property is removed from your estate

Other Types of Donations

Cash is not the only type of donation suitable for charitable giving.  Appreciated publicly traded stock that you have held more than one year is long-term capital gains property. Stock donations make a strong gift because you can deduct the current fair market value and avoid the capital gains tax you’d pay if you sold the property.

Donations of long-term capital gains property are subject to tighter deduction limits – 30% of AGI for gifts to public charities and 20% for gifts to nonoperating private foundations. In certain, although limited, circumstances it may be better to deduct your tax basis (generally the amount paid for the stock) rather that the fair market value, because it allows you to take advantage of the higher AGI limits that apply to donations of cash and ordinary-income property.

Do not donate stock that is worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to a charity.

Choosing a Charity

If you would like to start making generous contributions now, but you aren’t sure which charity you want to benefit, consider a private foundation. Private foundations provide the donor with significant control over how their donation will be used. When selecting a charity make sure to research the organization.

As always prior to making significant charitable donations consult your tax and investment advisors who understand your goals and financial situation best. Smith and Howard and Smith and Howard Wealth Management professionals are knowledgeable in these areas and can help guide you achieving your charitable giving goals while staying within your financial plan and maximizing available tax benefits.

How can we help?

If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.