10 Tax Efficient Ways Clients Can Give to Charity
Americans are philanthropic in terms of time and money spent and as such your clients would probably benefit from your advice in how to make charitable donations in the most tax efficient manner.
Many people put giving to charity into the same category as putting money in the collection plate or donating to a Salvation Army bell ringer during the holidays. It may not always be cash, but it’s out of their cash flow.
Before handing over any money, you want to follow a few simple rules. Make sure the organization is a recognized charity. It should have a 501(c)(3) designation from the IRS, for one. Unless it’s pocket change, your gift should be acknowledged in writing by the receiving organization.
Logically, you want to do some research to determine how much contribution goes towards the organization’s mission and how much pays for overhead and fundraising.
10 Ways to Approach Charitable Giving
Let’s assume they’ve cleared those hurdles, here are 10 ways you can advise clients to donate in a way that benefits them most regarding taxes:
- Giving cash or checks. This is a good starting point. Under the new tax laws, taxpayers can deduct donations up to 60 percent of their income. Previously it was 50 percent.
- IRA required minimum distribution. According to the Chicago Tribune, If your client is older than 70 ½, they can transfer up to $100,000 a year from their IRAs to charities, have it count towards their Required Minimum Distribution, but not have it added to their adjusted gross income.
- IRA designated beneficiary. If an individual is an IRA beneficiary, they pay Federal income tax on the distribution they receive. If a charity is the beneficiary, they don’t pay Federal taxes and that amount is deducted from your taxable estate for purposes of calculating Federal estate tax.
- Donating a fully paid up life insurance policy. The donor should be able to take a charitable deduction for the gift to the charity. The charity can access the cash value immediately.
- Setting up a foundation or donor advised fund. Your client might want to give to charity, but not necessarily yet. They can setup a vehicle to receive their charitable contributions, then choose when to disperse them in the future. Usually the rules require a certain minimum percentage to be dispersed annually. Donor advised funds are a vehicle offering similar benefits without the higher financial thresholds associated with a foundation.
- Donating low cost basis appreciated stock. The donor gets the benefit of a charitable contribution without needing to pay taxes on the capital gain. The charitable organization doesn’t worry about capital gains either.
- Charitable gift annuities. Your client is generous yet they still need an income during their lifetime. This vehicle makes a gift to a charity, allowing the donor a partial tax deduction. The donor receives an income for the remainder of their life.
- Charitable remainder trusts. Another vehicle allowing a donor (or a designee) to receive income, up to 20 years. The donor receives a partial tax deduction. It’s an irrevocable trust, yet you may have a degree of control over changing the charitable beneficiary designations along the way.
- Donating artwork. It sounds simple, but it’s extraordinarily complicated. Logically, an art collector would donate art to an art museum. Art aligns with their mission. If the art fills a hole in their collection and will be on display, that’s the ideal scenario. If the pieces are of lesser quality and will quietly sold, now or within a few years, the tax advantages can be substantially less. This requires careful research
- Pledging over time. People buy houses and pay down their mortgages over time. Others take out car loans. Your cellphone plan probably amortizes the cost of the phone over several years. When charities conduct capital campaigns seeking major gifts, they often offer a “pay as you go” structure. The donor selects a giving level, makes an initial gift and pays the remaining amount at intervals, often over three years. It’s a payment plan with scheduled reminders. This allows donors to make a larger gift by budgeting it along with their regular expenses.
There are many ways of making charitable contributions. Choosing the most appropriate and tax efficient strategy usually requires the services of a tax advisor. This is another area where you add value.
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Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.