Charitable giving has become one of the hallmarks of the December holiday season. For those looking to support their favorite charities while reducing federal (and sometimes state) tax bills, here are ways to give generously and to save substantial tax dollars – a win for charity, and a win for you, too.
Outright giving
Writing a check or making a charge to your credit card are among the simplest ways of making a charitable gift. Gifts to charity are generally tax deductible provided you itemize tax deductions on your federal income tax return. For example, if you are in the 25% income tax bracket and contribute $10,000 to one or several charities, you can deduct $10,000 on your federal income tax return. You will reduce your taxable income by the $10,000, resulting in a tax savings of $2,500 ($10,000 x 25% = $2,500).
If you mail your check make sure the postmark on the envelope is no later than December 31, 2018. If you charge your gift to a credit card, you can only take your deduction in 2018 if your gift has been posted to your credit card account (not just submitted on the charity web site) by December 31, 2018.
Giving appreciated securities
The substantial gains in the stock market over the last 10 months make giving appreciated securities to charity especially tax-smart this year. For appreciated stocks, bonds, and mutual funds qualifying for favorable capital gain tax treatment that you have owned at least one year, you will receive an income tax charitable deduction for the fair market value of the securities given to charity. The added benefit is avoiding paying tax on the capital gains, which would have been the case if you had sold the securities and then given the cash proceeds to the charity. For example, if you own stock you purchased for $4,000 and is now worth $15,000, you will avoid paying taxes on the $11,000 of capital gain ($15,000 - $4,000 = $11,000 gain).
Keep in mind that the gift is only complete once the securities have been transferred to the charity. Allow sufficient time at the end of the year for the broker or investment company holding the securities to complete the transfer so that your gift is in the charity account no later than December 31, 2018.
Gifts that will pay income
If you are in or approaching retirement a charitable gift annuity allows you to make a gift to charity and receive income for the rest of your life. Gift annuity rates are quite generous compared to interest rates being paid by banks on Certificates of Deposit. You will receive an income tax charitable deduction for a portion of your gift. In most cases some of the income paid to you (and to a second person, too, if you wish) will be tax-free for a period of time. Gift annuities can be funded with cash or appreciated securities. For larger charitable gifts (i.e. $100,000 or more), a charitable remainder trust is another way to make a gift and receive income in return.
For donors 70 ½ or older
If you are 70 ½ or older, the IRA charitable rollover is a way to make a gift to charity of up to $100,000 per year and avoid paying income taxes on the gift from your IRA. The gift must come from your traditional IRA and must be transferred by the IRA administrator directly to the charity. The gift will satisfy your Required Minimum Distribution and will not be subject to income taxes. However, you will not be entitled to an income tax charitable deduction.
Conclusion
You should always consult your tax advisor about how charitable gifts will impact your personal tax situation. Take advantage of the many opportunities to make year-end gifts to sustain the work of your favorite charities, and to potentially maximize your tax savings as an added benefit for being charitably inclined.