By Paul Tarins IAR, RICP®, president and founder of Sovereign Retirement Solutions
Some games are more fun than others, especially when they don’t come with roadblocks. Trivial Pursuit might be considered moderately fun unless you’re playing with that older sister who would rather elbow you in the throat than lose a game to you. Freeze Tag? Also fun as long as you’re not playing in Florida during mosquito season (which is always). The game of charitable giving, however, comes with no potholes – it simply feels right.
Playing the Game
- One strategy to consider in the game of charitable giving is gifting your older vehicle to a charity. The charity you select may already have a car donation program. If so, make sure the charity is a 501 (c) (3). Both you and your charity of choice will come out winners if you take the steps to ensure that your accurately valued vehicle is properly transferred to the charity.
- Another plan of action in the game of giving is a charitable gift annuity. A gift annuity facilitates a lifetime fixed income stream to the donor. The qualified charity and the donor agree that the donor will make a gift to the charity in exchange for a lifetime fixed sum payment provided by the charity to the donor or the donor’s designated beneficiaries. Gift annuities are funded via cash transfer, marketable securities, or other assets. Benefits to the donor include a partial tax deduction based on the donor’s life expectancy and income stream as well as an income guaranteed by the charity.
- A popular, tax-efficient option in the endeavor of charitable giving is gifting appreciated stock. By donating stocks and other long-term appreciated securities with unrealized gains to charity, the donor benefits from a tax deduction for the full fair market value of the securities, up to 30% of the donor’s adjusted gross income. Capital gains taxes are avoided because the securities are donated rather then sold.
- One of the easiest and most tax-advantageous ways to give to charity is by donating long-term appreciated securities through a donor advised fund (DAF), which allows the donor to grow the donation tax-free based on the donor’s investment preferences. The DAF functions as a vehicle to donate to a public charity which then qualifies the donor for an immediate tax deduction. Another benefit of donating through a DAF is the ability by the donor to advise the organization on how to grant money to the donor’s charities of choice.
- If you’re 70 ½ or older, gifting your required minimum distribution (RMD) from your IRA to charity is an excellent play in the game of giving. The donation counts as your RMD but your adjusted gross income (AGI) will not increase. Keeping some or all of your RMD out of your AGI may help you avoid the Medicare high-income surcharge or help make less of your Social Security benefits taxable. A direct transfer from your IRA to a charity ensures a tax-free status. If you withdraw it from the IRA before donation, you can deduct the gift as a charitable contribution (if you itemize), but the withdrawal will be included in your AGI. This option might include the ability to write checks directly from your IRA to the charity, which ensures the charity is aware of who the donation is from as well as gives the donor the option to specify which fund within the charity the donor would like to support.
- Lastly, by transferring low-cost basis assets to a Charitable Remainder Trust (CRT), a tax-exempt trust is divided into two entities for the purposes of donating to the charity of your choice while provisioning lifetime income interest for a non-charitable beneficiary. Benefits include income tax exemption, the ability of the donor to claim a charitable deduction, and the ability to retain ongoing cash flow from a gifted asset.
A Win-Win Situation
If you want to successfully win in the game of charitable giving, taking these game plays into consideration will significantly increase your chances of a grand slam while ensuring that your gifts are not only personally beneficial but also benefit the charities of your choice. Any way you look at it, it’s a win-win for everyone.
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