Before we begin, the discussion of charitable giving as a tax-planning strategy is in no way intended to imply that charitable giving is strictly a tax-savings vehicle. Charitable giving is a way for individuals to express their values, which is ultimately more important to them than any tax savings.
However, one cannot ignore the tax impact of charitable giving. Understanding the tax implications of charitable giving allows an individual to more accurately assess the true “cost” of making such a contribution. For those looking for ways to give more, this is an important consideration.
First, the type of property donated has an impact on the tax consequences of the donation. If an individual owns appreciated stock, and has held that stock for more than one year, a gift of this stock would result in two benefits to the donor. First, the full value of the stock is allowed as a charitable deduction. In addition, the donor does not have to recognize the appreciation on the stock as income. Thus, the built-in capital gain is not taxed, but the donor receives the full fair market value of the stock as a deduction.
One downside for this type of deduction relates to income limitations. Generally, an individual’s donations for the year are deductible up to 50% of that individual’s adjusted gross income. In the case of non-cash donations, such as stock donations, that limitation is 30%.
A second consideration is how to make the contribution. For example, an individual may desire to make a very large contribution in one year (for example, in a year in which an individual has a large income event) but does not necessarily know how he or she wants to distribute those donations among various charities. One option would be to utilize a donor-advised fund. A donation to a donor-advised fund is deductible in the year of the contribution, but the funds can be distributed to the charity (or charities) in subsequent years. The donor is allowed to advise on where the contributions eventually go, but he or she does have to give up control of the grant-making process.
Similarly, for those individuals who desire more control, or wish to leave behind a legacy, consideration can be given to the establishment of a private foundation. A private foundation generally has a mission statement to convey the donor’s charitable vision. The private foundation will have a board of directors or trustees, including a combination of the donor, donor’s family, advisors, and independent parties.
As with a donor-advised fund, contributions to a private foundation are deductible when made to the foundation, even though the grants are made in future years. Cash donations to a private foundation are limited to 30% of adjusted gross income (as opposed to the usual 50% limitation) and non-cash donations are deductible up to 20% of adjusted gross income (as opposed to the usual 30% limitation). Private foundations entail more administration, regulation, and disclosure than a donor-advised fund, so it is crucial that an individual works with a trusted group of advisors during this process. The benefit to the donor is that the private foundation provides that individual with total control over the grant-making process.
As it relates to charitable giving, there is significant flexibility in how gifts can be made, and this article only begins to touch upon the many considerations. For example, for those with charitable intentions and estate-planning concerns, the use of charitable trusts may provide a solution to accomplish both.
If you want to discuss any of these options in more detail, please contact your WK advisor at (573) 442-6171 or (573) 635-6196.