Provide support and save taxes with this powerful tool

Donations to qualified charities are generally fully deductible. So not only can they provide much-needed support to causes you care about, but they also can be a powerful tax-saving tool. To ensure your gifts do as much as possible for both your favorite charities and your tax bill, discuss with your tax advisor which assets to give and the best ways to give them.

Cash donations

Outright gifts of cash (which include donations made via check, credit card and payroll deduction) are the easiest. The key is to substantiate them. To be deductible, cash donations must be:

Supported by a canceled check, credit card receipt or written communication from the charity if they’re under $250, or

Substantiated by the charity if they’re $250 or more.

Deductions for cash gifts to public charities can’t exceed 50% of your adjusted gross income (AGI). The AGI limit is 30% for cash donations to nonoperating private foundations. Contributions in excess of the applicable AGI limit can be carried forward for up to five years.

Stock donations

Publicly traded stock and other securities you’ve held more than one year are long-term capital gains property, which can make one of the best charitable gifts. Why? Because you can deduct the current fair market value and avoid the capital gains tax you’d pay if you sold the property.

Donations of long-term capital gains property are subject to tighter deduction limits — 30% for gifts to public charities, 20% for gifts to nonoperating private foundations. In certain, although limited, circumstances it may be better to deduct your tax basis (generally the amount paid for the stock) rather than the fair market value, because it allows you to take advantage of the higher AGI limits that apply to donations of cash and ordinary-income property (such as stock held one year or less).

Don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.

Other types of donations

Gifts of cash are simple and gifts of stock can be tax-smart, but many taxpayers make other types of donations, such as vehicles, collectibles, services and even use of property. For an overview of the deductibility of various types of donations, see the Chart “What’s your donation deduction?”

Making gifts over time

If you don’t know which charities you want to benefit but you’d like to start making large contributions now, consider a private foundation or a donor-advised fund. (See the Case Study “Taking a deduction today while benefiting charities over time.”)

Charitable remainder trusts

To benefit a charity while helping ensure your own financial future, consider a charitable remainder trust (CRT):

For a given term, the CRT pays an amount to you annually (some of which may be taxable).

At the term’s end, the CRT’s remaining assets pass to one or more charities.

When you fund the CRT, you receive an income tax deduction for the present value of the amount that will go to charity.

The property is removed from your estate.

A CRT also can help diversify your portfolio if you own non-income-producing assets that would generate a large capital gain if sold. Because a CRT is tax-exempt, it can sell the property without paying tax on the gain at the time of the sale. The CRT can then invest the proceeds in a variety of stocks and bonds.

You can name someone other than yourself as income beneficiary or fund the CRT at your death, but the tax consequences will be different.

Charitable lead trusts

To benefit charity while transferring assets to loved ones at a reduced tax cost, consider a charitable lead trust (CLT):

For a given term, the CLT pays an amount to one or more charities.

At the term’s end, the CLT’s remaining assets pass to one or more loved ones you name as remainder beneficiaries.

When you fund the CLT, you make a taxable gift equal to the present value of the amount that will go to the remainder beneficiaries.

The property is removed from your estate.

For gift tax purposes, the remainder interest is determined assuming that the trust assets will grow at the Section 7520 rate. The lower the Sec. 7520 rate, the smaller the remainder interest and the lower the possible gift tax. If the trust’s earnings outperform the Sec. 7520 rate, the excess earnings will be transferred to the remainder beneficiaries tax-free. Because the Sec. 7520 rate currently is low, now may be a good time to take the chance that your actual return will outperform it. (For more on the gift tax, see “Gift tax.”)

You can name yourself as the remainder beneficiary or fund the CLT at your death, but the tax consequence will be different. •

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