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Year End Charitable Giving

Just a couple of nights ago there was a knock on my door–it was one of our neighbor’s kids.  He was collecting money for a local group–raising money to support their sports programs. He’s a nice kid and it seemed a worthy cause. I grabbed my wallet, found some cash (which I don’t always have!) and wished him a lot of luck.  I didn’t get a receipt. I don’t plan to take a tax deduction and didn’t research the organization.

Why did I give?  It’s simple.  I was being nice to the kid next door.

But for the other charitable contributions that my family makes, the answer to “why I give, what I give and when I give” is an entirely different story.

Each year there are a small number of charities that my family donates to.  Why do we give to those charities? Mostly, it has been because we, or another family member or friend, experienced the charity’s good works.

What we give is mostly money, but over the years has included volunteer work, donation of goods, donation of life insurance and cash donations to pay the premium.

When we give is often throughout the year–particularly for those groups that we have a long history with. But we usually reserve a donation or two for a not-for-profit that we select at the end of the year.

Now, we are not talking about lots of money. But notice, our motivation is almost entirely out of a charitable intent. Of course, when it comes tax time, we do take the appropriate charitable deductions.  I’m always happy to take advantage of any deduction that I can get. Having the government help me with my charitable contributions is one of those few welcome parts of the tax code.

What about you? Why do you give? Is it a mix of charitable intent, the good feeling that giving may provide? The desire to help further the cause of the organization? Does your answer also include the potential reduction in income taxes that may accompany a charitable gift?

What do you give? Depending on what you give (cash, appreciated assets, ordinary income assets) there are different deduction limits spelled out under the tax code.

When do you give? A lot of charitable giving takes place toward the end of the year once you have a better understanding of your cash flow and tax situation.

There are many ways to make a charitable gift, ranging from the simple (outright gifts of cash) to the complex (charitable lead or remainder trusts). Charitable trusts can help you reduce your current income tax or even capital gains tax, provide a current or future benefit to the charity and retain some personal cash flow from the assets transferred.

Here are some of the rules involved with taking a charitable deduction:

  1. To take advantage of a charitable deduction the not-for-profit must be a qualified organization. You can check out the organizations on the IRS website.
  2. Cash contributions: Generally you may take an income tax deduction up to 50% of your adjusted gross income. You can carry the deduction forward for 5 years.
  3. Long term appreciated assets (such as stocks, real estate, etc. held for more than 1 year): you may take as a deduction the full fair market value up to 30% of your adjusted gross income. You can carry the deduction forward for 5 years.
  4. Ordinary income property (any property that would generate ordinary income if you sold the property rather than gifted the property to the charity–such as stock held less than one year): you may take a deduction of up to 50% your adjusted gross income. However, the amount you may deduct is limited to your cost basis (what you paid for the asset) and not the fair market value of the asset.
  5. There are also requirements that you must follow for when you file your tax return. An IRS brochure details the myriad requirements. You can get the brochure here.

We’re nearing the end of the year. Whether it’s the kid knocking on the door for a local charity, a Santa on the corner collecting for a national organization, a local or national not-for-profit (school, charity, religious organization) that has some special meaning to you, charitable contributions can fulfill a personal meaning or goal and have an income tax benefit for you and your family. What can be better than that combination?

The use of trusts involves complex tax rules and regulations.  Consider enlisting the counsel of an estate planning professional and qualified professional legal and tax advisors prior to implementing such sophisticated strategies.