4 Year-End Tax Strategies for Charitable Giving
From Andrew Carnegie to Mackenzie Scott, America has a long and proud tradition of producing great philanthropists who have erected universities and cultural institutions and bestowed generous gifts to causes and communities.
But it’s not just centi-millionaires and billionaires who are generous — average Americans are committed to charitable giving, too. According to a survey from the Associated Press-NORC Center for Public Affairs Research, roughly three-quarters of U.S. adults say their households have donated to a charitable cause.
While “’tis better to give than to receive,” it does help that the U.S. tax code rewards generosity. Of course, the structure of the gift is important when considering the tax implications of philanthropy.
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Heading into the second half of the year, many people begin to think carefully about their year-end giving strategy. Here are four structures to consider.
Direct giving
The simplest, most straightforward way to give to a charitable organization or cause is direct giving. While most people think philanthropy must involve monetary donations, you can also gift appreciated securities, automobiles, recreational vehicles, boats and other personal items, all of which will also qualify for a tax benefit.
Direct gifts of appreciated securities, for example, may allow donors to avoid recognizing capital gains while potentially receiving a charitable deduction for the full fair market value, subject to applicable IRA rules.
Not only is this the most common form of giving, it can also supplement the other structures outlined below.
Donor-advised funds
Donor-advised funds (DAFs), which effectively separate the tax savings from the charitable-planning component, are becoming increasingly popular.
With a DAF, an advisor opens the fund, and the donor immediately receives an eligible charitable income tax deduction. Meanwhile, the fund continues to grow, giving the donor time to decide how to disburse money.
Beyond the planning benefits, DAFs can provide meaningful tax savings. With the standard deduction for married couples (filing jointly) now at $32,200, most Americans will find that it doesn’t make sense to itemize their taxes for a standard charitable gift.
But if you can afford to bunch multiple years of charitable donations into one lump sum, it might help you surpass the standard deduction and realize significant tax savings.
This strategy is particularly helpful in a year when a family has an unexpected windfall, such as a large bonus, and it’s looking to offset larger tax liabilities. Another perk of setting up a DAF: You can name the fund, which can allow you to preserve anonymity.
DAFs are also great for teaching children about giving back and money management, as families can decide together how to distribute the funds based on shared values.
Charitable trusts
For families gifting larger dollar amounts, charitable trusts can wrap charitable donations in a larger estate planning framework. There are typically two trust structures which clients choose from when creating a charitable trust.
A charitable remainder trust provides income from investments during the donor’s lifetime, with the remaining assets ultimately passing to the charity.
Conversely, if a donor wants to leave assets to their children, a charitable lead trust operates in the opposite fashion — the charity receives payments for a specific period before the remaining assets pass to heirs.
Both options allow families to pair their charitable giving with estate planning to support both personal and philanthropic goals.
Foundations
Individual or family foundations provide donors with more control over named charities and benefactors, but this structure also requires a significant commitment, both financially and timewise.
Donors must be prepared to set up and fund the entire organization, including operational oversight and administrative expenses. Often, foundations can become difficult to sustain over time when the administrator steps away, and the foundation begins looking at how to wind down operations, either via a merger or dissolution.
While the idea of a foundation might sound appealing, we typically advise wealthier clients that they can achieve the same goals through either a donor-advised fund or a charitable trust.
Some parents like the idea of creating a foundation to provide a child with a job and an income stream. But if you’re simply looking for income, you can achieve the same goals by setting up a charitable remainder trust with the child as the income beneficiary, or as a grantor charitable lead trust, with children or grandchildren eventually inheriting.
Families sometimes view private foundations as a path to involving younger generations in philanthropy. However, donor-advised funds and charitable trusts can often provide similar opportunities with less administrative complexity.
Philanthropy is personal. Whether you give to express your values, honor a loved one or leave a legacy, the smartest philanthropists make it a win-win, structuring their gifts to increase both the effectiveness of their giving and the value of available tax incentives.
Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting or legal advice. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax adviser.
