Although your primary goal in charitable giving is to help make the world a better place, keep in mind that being strategic in your giving may lead to a win-win situation for you and your favorite causes.
The massive tax reform enacted near the end of 2017 included increases to the standard deduction, which means fewer Americans will be able to itemize their deductions, potentially eliminating that tax benefit of giving. As a result, it’s all the more important to consider how to give before you give.
Avoid capital gains taxes to help increase your gift’s effect
Charitable giving can be as simple as writing a check and dropping it in the mail. But before you pull out your checkbook, think about different ways to donate that may have tax benefits. Consider this example:
Suppose you’re holding in a taxable account $100,000 of stock you paid $10,000 for several years ago. The IRS would call the $10,000 your “cost basis.” If you want to make a significant donation to a charity, you could (1) sell the stock, (2) pay long–term capital gains taxes of up to 20 percent on the difference between the proceeds and your cost basis, or (3) donate what’s left to your favorite charity.
On the other hand, you could simply give the stock directly to the charity and avoid the capital gains tax. Assuming the charity is tax-exempt, it could then sell the stock without incurring capital gains tax and wind up having more than if you sold the stock yourself. The charity ends up with more if you simply donate the stock, and isn’t that the whole idea?
Help Enhance Your Investment Income
Suppose you hold in a taxable account a substantial amount of stock that’s paying you little or no dividends and you’re looking to generate current income. As in the example above, you could sell the stock, pay any capital gains taxes, and use what’s left to purchase other investments or make charitable gifts.
However, if you’d like to avoid immediate capital gains taxes, one strategy to consider is a charitable remainder trust, or CRT.
After you establish a CRT, you can donate the stock to the trust, which may give you a tax deduction for a portion of your contribution. The trustee can sell the stock without incurring immediate capital gains taxes and purchase other investments. The trust will pay income to you. Keep in mind, this income may be taxable to you.
You determine the payment you want to receive from the CRT based on a percentage (not less than five percent) of the donated stock’s fair market value. (IRS factors may limit the income payout. Your tax advisor will help you with this calculation.) Remember the larger your payout, the less of a tax deduction you may receive for making the donation.
At your death, the death of your beneficiary, or the completion of the trust’s term (it’s your choice), the trustee will distribute what’s left in the CRT (the remainder) to the charity or charities named in the trust document.
Give Pooled-Income Funds a Look
Although a CRT offers a number of advantages, there are costs involved. For example, you’ll need to enlist an attorney to draw up the trust document, and depending on whom you choose, you may have to pay for the trustee’s services.
For a less costly alternative, think about a pooled–income fund. It shares many features of certain CRTs, such as avoiding capital gains tax on your gift and the ability to make future contributions.
A pooled–income fund is created and maintained by a public charity. As its name implies, the fund is comprised of donations contributed by many different donors, which are pooled and invested together. All the donors are paid a share of the net income the fund earns. The income amount depends on the fund’s performance and is taxable to you.
When an income beneficiary dies, the charity receives an amount equal to that donor’s share in the fund. These funds are less flexible than CRTs. For instance, you cannot choose your income payout; you will be paid the net income the fund earns. The payout will vary from year to year, depending on what the portfolio generates.
In exchange for a lack of flexibility, a pooled–income fund offers simplicity. Rather than having your own trust document drafted, you will be provided with a standard agreement that lets you transfer your assets to the charity.
Consider Other Strategies
These are just a few charitable giving strategies for you to think about. Others available include charitable lead trusts, charitable foundations and donor advised funds.
Contact a financial advisor for more information about incorporating tax planning into your charitable giving and work with your tax advisor to determine the strategy, or strategies that may be right for you.
This article was written by/for Wells Fargo Advisors and provided courtesy of Chad F. Manning, Branch Manager, First Vice President – Investments Sherman, TX (903) 893-6656. Investments in securities and insurance products are not FDIC-insured/not bank-guaranteed/may lose value.