Tax Advantages of Charitable Giving

taxCharitable giving is not only wonderful for overall health and happiness, but it can have noteworthy tax advantages.

Benefits of Giving

The power of giving is the little-known investment that pays big dividends in the form of tax advantages.  It has been demonstrated in numerous studies that by doing for and giving to others, people can live an overall healthier, happier and longer life.  If fact, it has been found that:

  • Teenagers have lower rates of suicide and depression when involved in caring for others
  • Teenagers who are active in helping others foster increased physical or mental health often carry the benefits into adulthood
  • Those who volunteer on a regular basis live longer
  • Giving selflessly to others allows people to be less judgmental about themselves
  • Scientists studied neighborhoods in the United Kingdom and found that those with less crime, better schools, and overall happier and healthier residents had higher numbers of volunteers living in those neighborhoods
  • When patients have a serious illness such as multiple sclerosis show greater gains in health when they assist others

In addition, as reported by the National Marriage Project, couples who reported a higher “generosity scale” were far more likely to claim that they were very happy in marriage.

Financial Advantages

There are numerous, significant tax advantages to charitable giving.  However, a consultation with a qualified tax advisor regarding the amount and direction that donations should take is very important and should not be overlooked.  Some ways to give include:

  • Lump-Sum gift
  • Charitable gift annuity
  • Donor-advised fund
  • Charitable remainder trusts

Lump-Sum Gift

Before generously giving a lump-sum gift to any charitable organization, any donor should confirm that the recipient of their generosity is an actual charitable organization or qualifying charity.  The tax code defines which groups fall under each label.  Beware that just because a group claims to be nonprofit, they may not meet the litmus test of being a recognized nonprofit for tax purposes.

In order to receive the tax benefit from the lump-sum donation, estate taxes are lowered due to the removal of assets from an estate.  A qualified tax consultant can help donor decide whether to give a one-time gift or one that is staggered out over several years.  The tax consequences can be extremely meaningful.

Charitable Gift Annuity

An annuity is a fixed sum of money paid yearly.  A smart move for a person who purchases an annuity is to donate the principal to charity upon the death of the owner.  The owner still receives fixed payments (often monthly) which are less than the amount of an immediate annuity.  However, the money received is often more than the profit from a certificate of deposit.  For those who are older, the amount of the fixed payments is often greater.

If structured correctly, significant tax benefits can be realized from a charitable fixed annuity.  A complicated calculation involving the current value of the interest that remains is calculated.  Only an experienced tax professional should tackle this confusing task.  Taxes fall on the portion of the money received, while the remaining part is deemed tax-free as part of the return on principal.

Some different types of gift annuities include:

  • Single life agreement
  • Two lives in succession agreement
  • Joint and survivor agreement

All of these give flexibility toward who receives the fixed annuity payments.

Donor-Advised Fund

Separately identified funds or accounts that are maintained by an organization that is qualified according to IRS laws is considered donor advised funds.  All legal control over the funds is relinquished pertaining to investments and the grants to charities.  But not all control is lost to the donor.  The ability to recommend how the funds and other assets are distributed is retained by the donor.  This type of donation is treated as a regular donation by the particular charity.  To properly determine the amount of a contribution given, a tax advisor can calculate the donor’s income tax deductions in order to properly determine the amount donated for tax purposes.

For donor with appreciated securities, donor-advised funds may be an attractive option.  To avoid significant capital gains taxes when selling these funds, the after-tax costs can be decreased if those securities are donated to a donor-advised fund.

Charitable Remainder Trusts

A charitable remainder unit trust will pay a beneficiary a fixed percentage of the principal amount of the trust.  This provides donors with flexibility to make additional gifts to the trust.  This type of charitable remainder trust is irrevocable.  A fixed percentage of assets is distributed to a donor and upon death, the rest of the money goes to a charity of the donor’s choosing.

Capital gains taxes are avoided on the assets located in the trust, but the rules pertaining to these trusts must be compliant by the donor.  Although initially higher in initial donations to the unit trust, higher donations made to donor advised funds, and higher start-up costs, the donor is able to retain control over the payments received during their life and the charity that will receive the remainder of the trust upon the donor’s death.

Another type of charitable remainder trust is a charitable remainder annuity trust.  This is a vehicle of planned giving that involves a donor putting a major gift of property or cash into a trust that pays a particular amount of income yearly to the donor or beneficiary.  This type of annuity trust delivers a fixed amount of income to the beneficiary.  The remainder of the money goes to a charity upon beneficiary death.  

Whether generosity is given with sweat equity or monetary donations, the benefits can be substantial.  Big dividends are received when kindness and caring are involved.

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