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Trends in Fashion & Finance 12.21.2017

"The best time to plant a tree is 20 years ago. The second-best time is today."

Giving to Charity with Taxes in Mind

For those who have charitable desires, tax considerations may help make them become smarter philanthropists who give more by giving wisely.

As the end of the year draws closer, thoughts of year-end tax planning start to dominate those who plan ahead to take maximum advantage of what the IRS code has to offer.

While financial decisions should not be made solely for tax purposes, being aware of what is available can enhance an individual’s overall financial effectiveness.

For those who have charitable desires, tax considerations may help make them become smarter philanthropists who give more by giving wisely. An early start is always recommended as some moves can benefit you, your family, and the institutions and causes you care about.

But if you wait until the end of the year, time may work against accomplishing your goals.

Here is a list of some ideas to consider before the year’s end.

  • 1

    When most individuals and charities think about giving, cash is usually their focus. But cash makes up a very small portion of the wealth in this country — well under 5%.


    Most assets we hold are in investments, real and personal property, retirement plans, insurance and even in intangible form. It makes sense, then, to consider property other than cash as a source for giving and perhaps helping to solve some personal financial goals.


    The first place to look for this type of planning is for assets that are worth more than you paid for them.


    Consider some stock you paid $5,000 for that is now worth $10,000. You could sell the stock and pay the tax on the gain of $2,000, if taxed at a 20% rate. You could then donate the cash left to charity and take a deduction for $8,000. If you gave the stock to charity directly, you would avoid the gains tax and get a deduction for the full $10,000. And the charity receives more as well.


    Now simply expand this stock example to consider other assets that have appreciated, such as real estate, a business interest, a valuable collection of jewelry, art, or other property. These non-cash assets are referred to as asset-based giving and may not impact your personal lifestyle.

    There are different deduction limitations for such property versus cash, so be sure you are aware of the rules when considering such gifts.

  • 2

    The next step in considering charitable giving and its impact falls under the heading of planned giving. As Professor Russell James of Texas Tech University states, “Planned giving can do two things, reduce taxes and trade a gift for income.”


    The basic tools in this regard are the charitable gift annuity, the pooled income fund and charitable trusts. These differ in complexity and related cost, but all accomplish the basic goal of reducing taxes and trading the gift for income — in most cases substantially more income than is being enjoyed currently.


    When considering such planned gifts, you have the choice of giving directly to a charity or employing an intermediary such as a donor-advised fund or a private foundation. The rules differ for each, but they are similar in that you may make the gift today to the intermediary and then spread the grants to charities over time.


    These grants can differ in amount, timing and the recipients, and can be changed. These vehicles are also excellent ways to involve family members in the benefits of philanthropy, from giving to these funds, management and ultimately in the granting process.


    If you are over 70½ years old and have money in an IRA, it is mandated that you withdraw a required minimum distribution from your account each year. If you are also considering gifts to charity this year, then a qualified charitable distribution may be to your advantage.


    This “charitable rollover” allows you to give up to $100,000 directly from the IRA to the charity. The advantage is that the distribution satisfies the RMD and is not added to your adjustable gross income, which may help in keeping your Medicare premiums down, among other benefits.

  • 3

    Finally, many folks have life insurance policies that may no longer serve their original purpose. Perhaps these were purchased years ago to replace the breadwinner’s income or to pay an estate tax that is no longer an issue. Consider donating this asset, which may result in a substantial legacy gift.


    Depending on the type of policy and whether you will continue to fund the premium through gifts to the charity, you could enjoy current income tax benefits, and the charity may even be able to access the current policy values as well.


    I have covered the more popular methods of year-end giving. Some are simple and some are more complex. All require knowing what you are doing before initiating action.


    In that regard, I strongly recommend that you consult professional advice and run the numbers to fully understand the results. Start today. The Chinese have a saying, “The best time to plant a tree is 20 years ago. The second-best time is today.”


    The content provided should be used for informational purposes only and is not intended to be a substitute for professional advice. Always seek the advice of a relevant professional with any questions about any financial decision you are seeking to make.
    Securities offered through LPL Financial, member FINRA/SIPC.  Investment advice offered through HighPoint Advisor Group, LLC, a registered investment advisor.  HighPoint Advisor Group, LLC and Stonebridge Wealth Advisors are separate entities from LPL Financial.  There is no assurance that the strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.
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