Think back to your last charitable act. Was it impulsive — such as a cash donation to a Salvation Army Santa or a purchase at a charity auction? While these good deeds make a difference, being strategic about your charitable giving will enable you to make more of an impact, maximizing what you can give as well as what you will receive come tax time.
Your first step is to consider what philanthropy means to you. What do you hope to accomplish? What causes are you passionate about? Answering these questions will help you to stay focused and establish guidelines that lay out the amount and schedule on which you want to give, your income and tax needs, funding abilities and most effective giving methods.
Let’s say you are about to sell a highly appreciated asset (such as your business) and are looking for ways to be charitable — and tax wise — with the proceeds. Using a charitable lead trust (CLT) or a charitable remainder trust (CRT) could save you thousands (or millions) of dollars in taxes and provide much-needed funding to your desired charity.
With a CLT, the proceeds from the sale are placed into an irrevocable trust that creates a steady income stream to a designated nonprofit, as well as a significant tax deduction for you. At the end of the trust’s term, the asset reverts back to you or your beneficiary, depending on the type of CLT you design.
A CRT has the opposite effect, allowing your highly appreciated asset to be converted into a lifetime income stream for you. Upon your death, remaining trust assets go to your designated charity. You not only avoid capital gains tax from the sale of the asset; you also receive a reduction in income taxes now, as well as in estate taxes when you die.
Even if you don’t have a highly appreciated asset to sell, experts will tell you that you need to be strategic with charitable gifts. “Take, for example, IRAs and other retirement accounts, which are often someone’s greatest form of savings,” says Teresa Davis Pusztai, director of philanthropy for Make-A-Wish Colorado. “While bequeathing these accounts to a loved one other than your spouse may seem like a generous act, few realize the tax implications.”
Pusztai points out that while a qualified charity can utilize 100 percent of the asset, an individual may be subject to estate and inheritance taxes, as well as federal, state and local income taxes — in some cases the tax bill can exceed 60 percent. Not to mention, it is very likely that liquidating an inherited IRA will push your beneficiaries into a higher tax bracket, causing their annual income to be taxed at a significantly higher rate.
All charitable giving, whether it’s to a nonprofit or an individual, is a generous act. But with proper guidance from tax and estate-planning experts, you can preserve more of your wealth and have a much greater impact on the causes close to your heart. As a board member of the Center for Community Solutions, a San Diego-based nonprofit serving survivors of domestic violence and relationship abuse, I have seen firsthand the positive influence sustainable philanthropy can have on an organization. The fact that I see a tax benefit from my philanthropy is icing on the cake.