Making Sense of Charitable Giving
At Copelin Financial, we understand that many people and organizations have a great desire to give to the less fortunate or to causes they support. Charities are a logical choice for many people to contribute to, but the tax ramifications of giving to these organizations may not be perfectly clear. To ensure that both you and your charity of choice receive the most benefit from your gift, it is important to implement some charitable giving strategies that make your donation work for you.
Although you are free to give your assets to whomever you choose, if you want to receive the tax advantages associated with such a gift, you must ensure that the receiving organization is qualified. To be a qualified charitable organization, a group must not be politically active and must have been organized in the United States. They must also be operated on a 100 percent non-profit basis. In addition to charities, other qualified organizations can include:
- Veterans’ posts
- Some fraternal orders
- Civil defense organizations
- Volunteer fire departments
Along with cash donations, you may also give other items of value. The deduction limits may be more restrictive for non-cash items, but may still offer a tax benefit. Consider the following giving strategies to help your organization without taking a financial hit.
Any charitable contribution may allow you to receive a current income tax deduction. The deduction for a gift given outright may equal the value of the gift. If your gift faces certain limits, any amount that exceeds these limits may be carried forward for up to five years.
Spread out the cost of a charitable contribution over your lifetime by making an organization the beneficiary of a life insurance plan. This will allow you to make a large future gift without the upfront cost.
This is a specific type of trust that allows a trustor to place certain assets in the trust which then make payments to the charity. At the conclusion of the trust period, all the remaining assets are paid to the trustor or his or her heirs. This may eliminate or reduce the estate taxes assumed on appreciated assets that you know will eventually be given to the grantor’s heirs.
With this type of trust, the trustee can sell gifted investments that have experienced high appreciation and then reinvest the proceeds to create income without costing the trust any capital gains tax. This means that you may be able to use a properly planned gift to help you realign your investment portfolio. It could also increase your cash flow or help diversify your holdings. In some cases, you may qualify for income tax deduction on the present estimated value of the remainder interest that will be placed in the charity eventually. However, you will usually be taxed on any distributions you make to yourself from the trust.
Planned giving can be an excellent tool if you know how to use it to your advantage. This allows you to give essential support to the charities of your choice while still reaping some advantages.