CHARITABLE GIVING 101

As you planned and saved over the years of your working life, you might have also considered those in need. But did you know that you can take advantage of many charitable giving tax benefits? Read on to learn more.

Your golden years should be about you: after all, you’ve worked hard your whole life and now it’s your time, right? But for Americans with retirement benefits, charitable planning also involves discussions about the income tax benefits of using retirement benefits to fund the charitable gift(s). 

During the pandemic, many people connected through charitable giving. In 2020, U.S. charitable giving increased by 5%, reaching a record $471.44 billion, including contributions from individuals and foundations. Last year, it increased again by an additional 2.7%.

If you’re inspired to give in retirement, it’s essential to do so in a conscious, tax-efficient manner. Strategizing your giving allows you to prepare your estate, consider tax advantages, and keep your loved ones informed of your wishes. Here are a few key considerations for individuals looking to start or increase giving in 2022 and beyond.

Charitable Donations: Cash

Instead of selling your non-cash assets like stock and mutual fund shares and donating the after-tax proceeds, it may be advantageous to donate these assets directly to charity.  Donating cash is a simple way to give back. When you donate cash, your tax deductions are equal to the amount of money you donated minus any goods or services you received in return.

For example, if you made a donation to your favorite zoo by purchasing a membership, then the value of that membership would be considered part of your deduction. If you gave $100 to the zoo and they offered you 10% off any gift shop purchases, then you can only deduct $90 from your taxes—the amount after taking into account the value of what you received in return.

Donor-Advised Funds

Donor-advised funds are a charitable giving option that allows you to donate a nonrefundable amount, either in cash or securities, to the nonprofit of your choice. The fund’s administrator then sends out grants from the fund based on your preferences.

When you contribute cash, securities or other assets to a donor-advised fund at a public charity, you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth, and you can recommend grants to virtually any IRS-qualified public charity.

One advantage to this type of giving is that you can direct the fund’s administrator to send grants to the causes or organizations that you feel closest to. You also immediately receive the maximum tax benefit from the IRS for your contribution, and you can set up the funds to continue even after your death.

Charitable Trusts: Charitable Lead Trust (CLT)

There are two types of charitable trusts, a charitable lead trust and a charitable remainder trust (more below). Trusts can be used in estate planning to pass on a person’s assets smoothly and to the best financial effect. A charitable lead trust is a type of irrevocable trust designed to reduce a beneficiary’s potential transfer taxes upon inheritance.

A charitable lead trust works by donating payments out of the trust to charity for a set amount of time, which could be a certain number of years or the life of one or more persons. After that period expires, the balance of the trust is then paid out to the non charitable beneficiary, who could be the original donor of the funds (making it a “reversionary” trust) or someone else, frequently a family member (making it a “non-reversionary” trust).

Your gift tax deduction is immediate and based on the value of the income stream to the charity. Not only is this great for transferring wealth to your heirs, but it also provides consistent cash flow to the charity of your choice. The only disadvantage is that it requires annual administrative management.

Charitable Trusts: Charitable Remainder Trust (CRT)

A CRT works similar to a CLT, with one big difference: in a CRT, the beneficiaries and donors are paid first, receiving their stream of income before the charitable organization does. A charitable remainder trust is a great option for investors with highly appreciated investments who want to diversify their portfolios and provide income to a charity.

Charitable remainder trusts are irrevocable trusts that let you donate assets to charity and draw annual income for life or for a specific time period.

The IRS closely examines charitable remainder trusts to ensure they:

  • Correctly report trust income and distributions to beneficiaries
  • File all required tax documents
  • Follow all applicable tax laws and rules

This is beneficial because it gives you and your beneficiaries cash flow while still providing consistent income to your chosen charitable organization. The only disadvantage of this type of trust is the annual administration of the trust.

The IRS website states that in a charitable remainder trust:

  • A donor transfers property, cash or other assets into an irrevocable trust
  • The trust’s basis in the transferred assets is carryover basis, which is the same basis that it would be in the hands of the donor, for assets transferred to the trust during the lifetime of the donor
  • The trust pays income to at least 1 living beneficiary
  • The payments continue for a specific term of up to 20 years or the life of 1 or more beneficiaries
  • At the end of the payment term, the remainder of the trust passes to 1 or more qualified U.S. charitable organizations
  • The remainder donated to charity must be at least 10% of the initial net fair market value of all property placed in the trust

Charitable remainder trusts are irrevocable. Assets that go in can’t be taken back.

Tax Benefits of Charitable Giving

Overall, when you make a charitable contribution – whether it’s in the form of cash or hard assets like real estate – you can claim the amount of your gift as a deduction on your tax return. But there are limits to how much you can deduct. The type of gift and the entity receiving it play a large part in determining the magnitude of your deduction, but so does your taxable adjusted gross income (AGI).

From now through 2025, you have the opportunity to give all gifts in cash to public charities, including Donor Advised Funds (DAF), during the calendar year. This will increase your allowed deduction from 50% AGI to 60%.

However, if you are giving to private foundations, you will be limited to 30% AGI. Public charity gifts in the form of long-term marketable securities are also limited to 30% AGI, and even less at 20% if to a private foundation. 

Final Thoughts

Are you ready to make the most of your retirement? Factoring in charitable giving to your financial plan can help you meet your goals, and we’re here to help.

At APO Financial, we help you look at the bigger picture—especially when it comes to planning for life-changing moments. Our Fiduciary advisors are ready to guide you through your journey, from retirement planning to charitable giving.

Ready to get started? The first step is essential, so let’s get together for a complimentary visit to see if we want to travel down this road together. Contact us here today!

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