By Frank Stepp
Executive Vice President
Thompson & Associates
According to National Philanthropic Trust, 69% of all charitable gifts in 2020 were from individuals. In 2020 six out of ten (or 60%) of American households participated in some sort of charitable giving, according to The Philanthropy Roundtable. We are a generous country.
Giving to charity can be very satisfying when it compliments your goals. Fortunately, there are many options to choose from when you are considering making a charitable gift. Here are eight of the most popular methods to use:
- Cash
The most familiar type of gift is cash. Nonprofit organizations are pleased to accept checks or cash in any amount. Outright gifts of cash are fully deductible for federal income-tax purposes. When you make a charitable contribution of cash to a qualifying public charity, in 2021, under the Consolidated Appropriations Act, you can deduct up to 100% of your adjusted gross income.
- Securities
Nonprofits accept gifts of publicly traded stocks, bonds, and mutual funds at fair-market value. Fair-market value is determined under IRS rules.
A gift of appreciated stock held by a donor for more than a year offers the donor a three-fold tax savings. First, the donor avoids paying any long-term capital gains tax on the increase in value of the stock. Second, the donor receives an income tax deduction for the full fair-market value of the stock on the date of the gift. Finally, the stock will not be included in the donor’s estate upon the donor’s death.
- Real Estate
Whether it’s the family home, undeveloped land, or rental property, your real estate held for more than one year may be the most highly appreciated asset you own. This means you could face significant capital gains taxes if you sell your real estate. donating real estate to a 501(c)(3) public charity could allow you to leverage one of your most valuable investments to achieve maximum impact with your charitable giving.
When an individual makes an outright gift of real estate to an organization, the donor can take a charitable deduction of the fair-market value of the property contributed. In addition, the donor avoids capital gains tax on the profit that would have been taxable if the property had been sold and then donated to charity, which may increase the amount for charity by up to 20%. Finally, the asset will not be subject to estate tax at the time of the donor’s death.
- CGAs
With charitable gift annuities, donors give an irrevocable gift of cash or securities to a nonprofit in exchange for a fixed income payment for a set term or for life. The donor can take an immediate tax deduction while the nonprofit can invest and grow the funds. When the donor passes or the annuity term is up, the nonprofit keeps the leftover funds. Some choose to defer their annuity payments until they retire, resulting in higher payments.
Charitable gift annuities are a good giving option for donors who want to make a gift while still protecting their income. This is a good way to enjoy a yearly income while still making a significant impact on a cause you care about.
- Retirement Plan Assets
Using IRAs and other retirement plan assets is a far-sighted and thoughtful way to make a charitable contribution. It provides a donor several significant financial and tax advantages. Unlike many assets, retirement plan assets are potentially subject to both income and estate taxes. Naming a nonprofit as the beneficiary of a retirement plan (including IRAs, 401(k)s and profit-sharing plans) can eliminate estate and income taxes, if the gift is structured properly.
- Charitable Trusts
When a donor contributes assets to a charitable trust, they then receive annual income based on a fixed percentage of either the annual fair market value of the trust or based on the amount of the initial assets used to fund the trust. At the end of the trust’s term, the remaining balance goes to the nonprofit. These trusts usually give a donor an income for a term of up to 20 years or for life.
Charitable trusts are best for donors who want to make a gift while still enjoying an income from their assets. Or anyone who is subject to paying capital gains taxes on appreciated assets.
- Bequests by Will or Trust
Bequests are the most common form of deferred gifts, accounting for approximately 80% of all deferred gifts each year. Bequests are one of the simplest, most impactful, and popular ways to make a planned gift.
To make a charitable bequest, a donor allocates a portion of their estate to a nonprofit in their legal will. Assets can be allocated by, specifying an amount of cash (i.e., $10,000), or a percentage of the total estate, or by a residual bequest. A residual bequest directs the remainder of the estate or a designated percentage of the remainder of the estate to charity, after all other provisions in the will or trust are satisfied and all estate administrative costs are paid.
- Beneficiary Designation
If donating income-earning assets is a concern, consider making a charitable gift via a beneficiary designation. You can designate charitable organizations as the beneficiary of all or a portion of various assets (i.e., retirement accounts, life insurance, annuities, etc.) at the time of your death. Such beneficiary designations are revocable. They may be changed at any time during your lifetime.
Donating from a tax-deferred retirement account is a tax advantage because charities do not pay income tax. This means the full amount of your donation will avoid income tax and directly benefit the charity of your choice. It’s possible to divide your retirement assets between charities and heirs according to any percentages you choose.
These are just a few ways you can receive tax breaks in exchange for your charitable gifts.
