If you’ve given to charity in past, the first thought that came to mind was most likely who or what you’d like to support. Naturally, this is the case for most us.
However, how you give to charity can meaningfully influence the impact of your contributions and the benefits you receive in return.
With numerous charitable strategies to choose from, along with a host of other factors to consider, it’s not always clear how to give (and get) the most out of your charitable efforts.
In this article, we provide an overview of the basic tenets and primary benefits of four charitable strategies commonly used by affluent individuals and families.
What Does Charity Mean to You?
Charities come in many shapes and sizes, so begin by asking yourself who or what you wish to support. Search tools like Charity Navigator or the IRS’ Tax Exempt Organization Search site are great resources for researching charitable organizations across a variety of causes.
Benefits of Charitable Giving
Of course, the opportunity to pay it forward is the driving force behind most people’s decision to give back. Nonetheless, there are several other benefits to charitable giving that should not be overlooked.
- Gifting can reduce your tax liabilities.
- Gifting during your lifetime can help properly distribute your estate.
- Gifting certain assets allows you to transfer tax liability and maximize the value of your gift to charity.
Charitable Giving Strategies
1. Donor-advised Funds (DAF)
A donor-advised fund is a private investment account used to manage and facilitate charitable donations. DAFs are a popular strategy due to their ease of administration and the control donors retain over the placement of their gifts.
Contributions to donor-advised funds can be made in several forms:
- Cash (min of $5,000)
- Public stocks, bonds, or mutual funds
- Private stock
- Money from your IRA and 401(k)
- Life insurance
Contributions to DAFs are tax deductible in the same year the contribution is made. This provides donors an immediate tax benefit with the freedom to later decide how and where to place donations.
This feature is particularly attractive if you require a large tax deduction to offset a portion of your taxable income for a particular year.
You can deduct up to 60% of adjusted gross income for cash contributions. Securities held for over a year may be deductible at 30% of AGI. (Securities held less than a year would only be allowed a deduction on the cost basis amount)
2. Gifting a Highly-Appreciated Asset
Gifting an appreciable asset, such as public stock, is an increasingly popular strategy due to its unique tax benefits.
There are two key benefits to this strategy:
- When gifting an appreciable asset to a 503(c) organization, you can claim a federal income tax deduction (up to the IRS limit) that is equal to the market value of the asset
- Any appreciation on the asset is not subject to capital gains tax if donated before selling, allowing you to donate more than you otherwise could with a cash donation.
Following the recent increase to the standard deduction – $12,950 for a single tax filer and $25,900 for married couples – many people lost the ability to claim a charitable tax deduction at year-end.
Bunching is a gifting strategy that consolidates multiple years of giving into one tax year, allowing for a large taxable deduction in the year of giving and zero in the subsequent years. Because of this unique feature, bunching is an effective strategy for those looking to reclaim charitable tax benefits at year-end.
Combining a bunching strategy with a Donor Advised Fund also allows the donor to reap the donation when needed, and later dole out contributions to charities in the years to come.
4. Starting a Private Foundation
A private foundation is an independent legal entity set up solely for charitable purposes, offering similar tax advantages to donor-advised funds but operating on a much larger scale.
There are more complexities and rules associated with a private foundation. For example, there is an IRC Code requiring private foundations to distribute 5% annually for charitable purposes.
Because of the larger scope of operations, private foundations provide families an attractive opportunity to give back to others while simultaneously reducing estate assets and, in turn, estate taxes.
Wrapping it Up
There is no one-size-fits-all strategy when it comes to charitable giving. Determining the optimal strategy is largely a function of your unique personal and financial circumstances.
For this reason, it’s important to work with a financial advisor with experience building sophisticated charitable strategies tailored to your situation.
Support Your Causes in a Smarter Way
Venturi Wealth Management, LLC is a registered investment adviser. Registration does not imply any level of skill or training. For additional information about Venturi and its investment adviser representatives is available on the SEC’s website at www.adviserinfo.sec.gov. As always, we invite you to visit our website at venturiwealth.com at any time to read more about the Firm and the services we provide.