Year-End Tax Planning: Bang for Your Charitable Buck

During this season of giving, many take the opportunity to make annual gifts to deserving nonprofits. Here’s what you need to know about the tax implications of your charitable donations.

When it comes to charitable giving, Americans are generous, donating hard cash, appreciated stock, even art.

Last year, we collectively gave a record-setting $375.25 billion in charitable dollars, with 71 percent of that coming from individuals, as opposed to foundations or corporations, according to Giving USA, which publishes an annual report of philanthropy in the U.S. based on research conducted by the Indiana University Lilly Family School of Philanthropy.

In high net worth households, giving is on the rise with about 98 percent donating to charity in 2013, compared to about 95 percent in 2011, according to the 2014 U.S. Trust Study of High Net Worth Philanthropy.

People are inclined to donate for a number of reasons; mostly, it’s because they feel good giving and recognize a need. However, there are also tax incentives to charitable giving. To be sure, as we would expect from the Internal Revenue Service, giving — especially for high net worth individuals — requires an attention to detail few lay people possess.

“My job is to help them to do it in the most tax-efficient way,” says Ramsay Slugg, managing director and member of the National Wealth Strategies Group at U.S. Trust, Bank of America Private Wealth Management. “It’s going to be different for different people, depending on income, and what types of assets they own. It’s a customizable design.”

There are three main vehicles for making charitable donations: a straightforward monetary donation of cash, a check or an appreciated asset (i.e., stock) are the most common and simplest ways to gift. The tax benefit is a function of one’s marginal personal income tax rate. For example, a person in the highest tax bracket of 39.6 percent who contributes $1,000 to a qualified charitable organization will get $396 of that donation back as a credit against his or her tax liability, plus a deduction at the state level.

However, more sophisticated vehicles for gifting could provide greater tax benefits. Individuals or families often choose to set up their own private foundations or donor-advised funds that serve as intermediaries between the donor and the receiving charity, without ceding control as to where the funds are distributed.

With these vehicles, donations to public charities yield higher tax deductions than to private charities. Generally speaking (and you can be sure, there are myriad exceptions), one can write off up to 50 percent of adjusted gross income when donating to a public charity versus a write-off of 30 percent when giving to a private foundation.

Public charities are organizations such as churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities, and nonprofits (the Greater Chicago Food Depository is just one example). They actively raise funds and receive contributions from many sources. Private foundations, on the other hand, typically have a single major source of funding (think the Bill & Melinda Gates Foundation) and tend to grant money to other organizations rather than operate charitable programs.

A third vehicle is known as split-interest giving. With a split-interest charitable gift, the asset is split into two parts: income that is produced by the asset and the principal remaining after the income interest is paid. Through a properly designed charitable trust, a split-interest gift may provide a current federal income tax deduction, a reduction in the federal estate tax bill, and/or an avoidance or delay of a capital gains tax.

“After evaluating a donor’s personal situation, I often recommend the donor advised fund, which has the best tax benefits, but it is not always the most appropriate vehicle for some donors who are better suited for creating their own private family foundation,” says Susanna Poon, director of philanthropy services with CTC | myCFO, a part of BMO Financial Group.

Charitable giving is not a profitable endeavor. Instead, people donate money for a number of reasons related to their values and long-term goals for their families.

“Most family offices donate money to the charities that have special meaning to the family member[s],” says Ryan Liss, president of Caliber 88 Tax & Wealth Planning Services, Inc. in Highland Park. “A family foundation allows them to create an entity which greatly furthers family unity and acts as a fantastic teaching tool for the younger generations.”

The fact that there are these options is good news for those seeking tax-efficient ways to put their money to work for good. And with the current strength in the financial markets — the Standard and Poor’s 500 is at or near an all-time high depending on the day — analysts expect the current upward trend in giving to continue.

“Unless we have some sort of hiccup in the economy, I think we will see a consistency of record giving,” Slugg says.


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