If you make a donation to a public charity, you are not limited to donating cash. Depending upon your finances and personal goals, you may be able to donate different types of accounts or pieces of property to the charity instead.
The fastest and easiest way to make a financial impact for your favorite charity is clear: just write a check. Your check may be part of your weekly donation to a church, in which case you can count the entire amount as a donation to the church. On the other hand, you may choose to attend a dinner sponsored by a charity, and in that case, only a portion of the purchase price will be eligible for the income tax deduction. In a case like this, the amount that you paid for the event should be reduced by the amount of benefit you have received (i.e., the cost of the dinner). The remaining amount will be considered a charitable contribution. Tax-exempt organizations that host these types of events typically print the cost of attendance and the amount that is considered a charitable donation on the ticket or advertising. This amount can be deducted from your income tax for the year the gift was made. For most cash donations, the total deductible amount is limited to 60% of your adjusted gross income.
Donating appreciated property (such as publicly traded stocks or real estate) to a charity allows you to avoid the capital gains tax that would otherwise be due upon its sale. If you were to sell the stock or real estate and give the cash to a charity, you would first be required to pay capital gains tax on any increase in its value from the date of purchase to the date of sale. However, if you donate the property to the charity and the charity makes the sale, the charity will not pay tax on the capital gain. Also, when making a gift of appreciated stock or real estate that you have owned for more than one year, you can receive an income tax deduction equal to its fair market value. If you are donating appreciated property that you have owned for less than a year, the value of your donation is limited to the fair market value of the property at the time of donation minus the amount of growth (appreciation), otherwise known as the cost basis. Be aware that the limit for donating appreciated property to charities is 30% of your adjusted gross income.
While this option can reduce your taxes, do your research to make sure that your charity accepts these types of donations. Some small organizations may not be able to invest, manage, or sell appreciated property and would prefer cash.
If you are 72 or older and want to donate money to a charity, you may be able to make a qualified charitable distribution from your account to the charity and avoid paying income tax on the distribution. If you take the required minimum distribution (RMD) and then donate the money to a charity, you will be required to pay income tax on the RMD. Especially if you do not need the RMD, a charitable distribution will satisfy the requirement that you take the annual distribution, allow you to support the charity, and let you avoid paying income tax on that distribution. However, note that a qualified charitable distribution does not qualify for an income tax deduction because the distribution is not included on your income tax return as income to be taxed.
You can also donate your retirement account by naming the charity as a beneficiary so that after you die, the charity receives it. No matter who receives distributions—you or your beneficiary—each distribution is subject to income tax. By donating the retirement account to a charity, you let the charity use the money without incurring an income tax liability. Although the retirement account will still be factored into computing any estate tax that could be owed upon your death, your estate will receive a tax deduction that can help offset the estate tax owed. Additionally, since the charity will not have to pay income tax on the distributions from the inherited retirement account, the organization will receive more benefit from the account than an individual would.
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Giving to your favorite charity benefits society, and it also offers tax benefits to you as the donor. We can help you and your financial team develop a strategy that will benefit all parties involved. Contact us today so we can discuss your goals and help you leave a lasting legacy.