The American public continues to be generous to their favorite causes. It
is estimated that over $200 billion was given to charities in 2000. Along
with enabling their favorite charities to continue their good works, many
include charitable giving as part of their overall income tax and tax
planning strategy. This article identifies some of the issues you may want to
consider as you plan your charitable giving activities. You should always
make sure the charities you are considering are legitimate and you should
consult with your financial or tax advisor to better understand how the tax
laws apply to your situation.
Income Tax Deductions
If you itemize your deductions, contributions to qualified charitable
organizations can be claimed as deductions. There has been considerable
discussion as part of many tax law changes about enabling non-itemizers to
also get tax relief from charitable contributions. However, at this time,
only taxpayers claiming itemized deductions get this benefit.
The amount you can deduct for charitable contributions is generally the
fair market value (FMV) of what you give. For cash contributions, it is
simple. Your deduction is just how much you gave. If you give other property
(like stocks, real estate, art or other items), determining fair market value
can be more difficult. For publicly traded securities, FMV is calculated as
the average of the high and low prices for that security on the date it was
transferred to the charity. For illiquid or non-publicly traded securities,
you may need to get an appraisal to determine the FMV. In addition, the
property (or securities) must have been held for more than a year.
Limits on Deductions
The tax laws do place some limits on the total amount of charitable
contributions that may be claimed on individual tax returns. For
contributions of cash to public charities (not private foundations), you may
claim deductions up to 50% of adjusted gross income. If appreciated
securities are given, there is a limitation of 30% of adjusted gross income.
Deductions in excess of these limitations can be carried forward and used
over a five year period.
Why give appreciated securities?
Donating stocks (or other securities) that have risen in value since they
were acquired offers two tax benefits. As long as you have held the
securities for more than a year, you can claim a deduction for the
appreciated value and you avoid paying tax on the capital gain. If you have
held the stock for less than a year, your deduction is limited to your cost
basis. If you donate a stock that has fallen in value, your deduction is
limited to the fair market value.
Consider the following:
You bought 100 shares of XYZ stock several years ago for $25 per share and
it has now risen to $60 per share. In other words, your $2500 investment is
now worth $6000 and you wish to give $6000 to your favorite charity.
If you donate the shares to a charity, you get a deduction for $6000 and
pay no income tax on the gain. If you sell the shares, you would pay tax on
the capital gain of $3500 (probably 15% of $3500 or $525) leaving you only
$5475 to donate. By giving the shares you avoid the capital gains tax and the
charity gets the full $6000 value. The charity could then sell the shares and
have the proceeds to use.
Other Alternatives
There are more sophisticated trust strategies that some individuals use -
charitable remainder trusts and charitable lead trust. With a
charitable remainder trust, a donor contributes property
(usually money, securities or real estate) to a special form of trust. During
the donor's lifetime or some period, the income from that property is
distributed to the donor. On the donor's death or at the end of the specified
period, the remainder goes to the charity.
With a charitable lead trust, the effect is the opposite.
The charity gets the income for the lifetime of the donor (or some period)
and the remainder goes to the donor's estate or some other beneficiary at the
end. These types of trust are complicated to set up and administer and
usually only used as part of a sophisticated estate plan by wealthier
individuals. Qualified legal and tax assistance is a must.
Another contribution vehicle that has become popular in the past few years
is the donor advised fund. These funds have been established by many mutual
fund companies and function like this:
-- A person donates cash or appreciated securities to the "donor
advised fund." Usually, these funds require a minimum of at least $10,000.
The contribution is irrevocable.
-- The donor gets a tax deduction for the contribution in the year it is
made.
-- The fund invests and manages the contribution along with the rest of the
moneys within the fund.
-- The donor recommends which charities are to receive the
contributions.
-- The "donor advised fund" evaluates the recommendation and
makes the contribution.
The benefits of this approach include the ability to get an immediate
deduction while the contributions are made later. In addition, the fund
professionally manages the moneys and handles much of the paperwork. Be sure
to thoroughly investigate any organization offering donor advised funds
before enrolling.
Summary
Charitable contributions enable many worthwhile organizations to carry out
their missions. Donors can get emotional satisfaction and tax benefits
through their giving. The tax laws are structured to encourage giving and
there are ways to maximize the tax benefits of giving. Using some of the more
sophisticated ways of giving can get complicated and is always advisable to
use professional help in evaluating them.
