5 Ways To Give To Charity

Many people want to give back in some way. This might be to their community, their church, their university, or a special charity. This type of legacy can be great – here are the 5 best ways to accomplish this for different situations.

Give early

Giving cash is the least effective tax strategy but it is important to understand how it affects your taxes. At the end of each year, you have 2 options to take deductions.

1. First is the standard deduction (In 2022-12,950 single / 25,900 married) – what this means is the IRS automatically reduces your income by this much before they estimate your taxes.
2. The second option is to itemize your deductions. The only benefit to itemizing is if the sum of all your deductions is greater than the standard deduction. To reach that number you could that give a gift early to overcome the standard deduction level if desired.

Let’s look at an example: Dan is married, this year he gave $10,000 to his favorite charity and had other deductions worth $12,000 – it would not be beneficial for him to itemize which means that his $10,000 donation did not provide a taxable benefit.

If Pat knew he was going to give $10,000 to his charity again next year, he could donate the additional $10,000 this year which would push his deductions to a total of $32,000 and create a $6,100 reduction in his taxable income. It’s important to note Pat’s strategy would only work every other year unless Pat decided to make much larger gifts or his other deductions increased.

Gifting Stocks and Bonds

Gifting any stocks or bonds provides a leg up over giving cash. While both are eligible for an itemized deduction, stocks and bonds could have appreciated since you purchased them. Appreciated stocks and bonds are typically subject to capital gains tax, depending on when you purchased them. A smart way to donate and avoid the capital gains tax is to gift stocks and bonds to the charity of your choice.

Many charities have a process to receive stocks and bonds and can help you execute this strategy. The advantage is that you get to make a bigger impact than you would have with cash.

For example: if you bought $1,000 stock and its now worth $2,000 – you could gift the full $2,000 of stock instead of only $1,700 in cash assuming you liquidated the stock first ($2,000-15% capital gains), which is what most people do.

Donor advised funds

Another way to give is to create a Donor advised funds which allows you to delay the actual gift. With a Donor advised fund you can move most asset types into the fund, but they don’t have to be distributed until a later date of your choice.

You get the tax benefit when the assets move into the fund, but the distribution can happen at any time. It does not have to be the same year. Donor advised funds can also uniquely hold stocks and bonds themselves which gives them the ability to continue to be invested.

The only downside of a DAR is that once you get the tax deduction, sometimes it delays the gift to the actual charity and those in need don’t get the gift that could help today.

CRUTs

A Charitable Remainder Unitrust is an irrevocable, sophisticated strategy for certain assets that have seen a significant gain. You put an asset into a trust, get a tax deduction on a portion of the value (usually 10%), you get income from it each year but when you die, that’s when the charity get’s the actual gift.

After you move the asset (business, real estate, stock, etc) into the trust, then you can sell the asset, completely tax free, inside of the CRUT. Each year you or the any non-charitable beneficiary will get a distribution from the CRUT based on the IRS actuarial tables related to your age. Important note – you will pay income tax on the distribution.

You can continue to add assets to the CRUT because it will be re-valued each year. When you die, that is when the remainder of the CRUT passes on to the charitable foundation you selected.

This is a great way to reduce your taxes, keep a portion of the revenue, and give to the causes you are passionate about at death.

CRAT

A Charitable Remainder Annuity Trust follows similar principles as a CRUT with two key differences. First is that a CRUT is not revalued each year – the starting value establishes the amount that will be paid out to both the non-charitable and charitable beneficiaries.

Secondly, the benefit paid to the non-charitable beneficiary is fixed and insured as an annuity rather than subject to the IRS actuarially tables.

Both CRUTs and CRATs exist for you to get a deduction, receive some income along the way and leave the final gift to the charity.

Takeaway

There are several ways to make a financial impact on the organizations that impacted you but it’s important to understand your options and determine which vehicle provides a win/win for the charity and you.

Disclaimer: This post is for informational purposes only and is never to be taken as advice or a recommendation. Talk to a tax or legal professional to determine how this information best applies to your personal situation.