Hopefully, you've recovered enough from tax season to let me talk about something tax-related. (And for those of you filed an extension: I'm sorry!) This is not your ordinary article on IRAs, IRS rules, or tax-reduction strategies.
Instead, I’m going to write about something that’s a little more emotional: donating to charity. Most of us enjoy supporting nonprofit or charitable organizations that promote our values — just to help others. But there are valuable tax considerations of charitable giving to remember.
This isn’t a comprehensive list, and when it comes to taxes, you should always talk to your tax advisor. Each offers some key advantages and potential drawbacks. However, each of these techniques can help you put your money where your heart is.
Direct Cash GiftsPenning a check is probably the easiest and most common method of giving. There’s not a lot of planning required, and when you write a check to what the IRS considers a qualified organization, the tax benefits are immediate. However, easier isn’t always better. One slight twist on this approach is to gift appreciated assets such as stocks, mutual funds or other investments. By giving those investments directly to the charitable organization, you to avoid capital gains on their sale and you also reap the tax benefits of the charitable gift. It’s a double win of sorts. Cash gifts are generally deductible up to 50% of your adjusted gross income, while contributions of capital gain property are typically limited to 30% of your adjusted gross income.
Your WillYou can make a charitable bequest of money, a specific property or even what’s left over after the rest of your estate is settled. This type of charitable gift may qualify the estate for special tax benefits. However, be warned: It will be part of the probate process, so it might take some time and it will definitely be public if privacy is a priority.
Beneficiary DesignationOver the years, I’ve worked with several folks who have named a charitable organization as a beneficiary on their insurance policy, individual retirement accounts (IRA) or 401(k). This is a quick and easy way to make a gift when you’re gone. Since the charity would not have to pay income tax on the gift, it could be a huge benefit. If a loved one receives that IRA as a beneficiary, it comes with a huge tax bill. But charities do not have to pay income tax if they receive donated assets such as an IRA or 401(k). That makes your donation go further. Of course, beneficiary designations supersede what’s in your will, so this approach needs to fit into your overall plan.
Donor Advised Fund (DAF)Never heard of this tool? You’re probably not alone, so let me explain the high points. A DAF is a charitable vehicle that lets you make a gift of cash, appreciated assets or other property. You are eligible for a tax deduction in the same year you make the gift. But, in the fund, your gift can be invested and grow tax-free. Now or in the future, you can decide what charitable organizations can benefit from the money. Sometimes turning art work, collectibles or other complex assets into a charitable donation can be a challenge, but that’s not the case with a DAF. We made the USAA Giving Fund available last year to give members this option — one that’s simple, private and flexible.
If you’re searching for more in-depth reading on this topic, IRS Publication 526 is a good place to start.