Charitable Giving Options
Tax Day is fast approaching and the prospect of refunds and payments are on many people's minds. The best time to begin future tax planning is right now. One way to reduce tax liability, while benefiting a cause you love, is through charitable contributions.
Do you love the ocean? Are you passionate about ending human trafficking, tackling global warming, or supporting medical initiatives?
As an advocate and active member of the non-profit leadership community, I am happy when clients consider how they can give back to the organizations they love, and will highlight some tax-wise contribution strategies we can employ both during our lives and beyond.
First, we’ll look at some of the impacts of the recent Tax Reform Act upon charitable giving and tax-exempt organizations. Next, we’ll discuss how donations made through one’s Estate Plan (aka Planned Giving or Legacy Giving) can be both smart tax planning and go further for those causes you care strongly about.
Charitable Giving & Tax Exempt Organizations
There are a variety of ways to benefit charities during one's lifetime. These include making direct gifts to charities, private foundations, supporting organizations, and donor advised funds. There may be differences in tax treatment for donors depending on the type of entity receiving the donation. If the tax benefits are a consideration in determining your giving, please make sure to seek an accountant for advice. However, there are some significant changes in the Tax Code as of late 2017 that are summarized below.
-You can now contribute more! The maximum contribution is now 60% of your adjusted gross income (AGI), which is increased from 50% from previous years.
-The standard deduction has been increased to $24,000 for a married couple filing jointly and $12,000 for single individuals. While this is good news for most, it also means that those who fall below that amount will receive no tax benefit for contributions made in that year. For those who regularly donate, it may be more desirable to aggregate several years of donations into a single calendar year. (It is important to speak to your accountant if you have these goals.)
- Because many deductions for state and local taxes have been reduced or eliminated, charitable contributions are now a great option to fill the gap (at least for those that itemize their taxes). These deductions include mortgage interest, casualty losses, uncompensated employee expenses, home equity loan interest, and miscellaneous other itemized expenses. (https://taxfoundation.org/state-and-local-tax-deduction-primer/)
-Tax-exempt organizations now are affected by an excise tax on highly compensated employees (21% of compensation that exceeds $1 million is paid by the organization).
Planned Giving to Charity
There are also ways to benefit charities in the future, such as charitable contributions made through one’s Estate Plan, also known as “Planned Giving.” These gifts can either be made in a Revocable Living Trust, or in an Irrevocable Trust in the form of a Charitable Remainder Trust (CRT) or Charitable Lead Trust (CLT).
For Revocable Living Trusts, it is important to have your Estate Planning attorney incorporate their recommended language into your documents. It is also a good idea to let the organization know of your planned gift; some organizations have special recognition and perks for those who are including the charity in their Estate Plan. As part of my standard practice, I research and contact organizations that my clients name as beneficiaries to ensure that everything is done correctly.
For Irrevocable Trusts, the options include Charitable Remainder Trusts (CRT) and Charitable Lead Trusts (CLT). Both are set up to benefit one or more charities, as well as noncharitable beneficiaries.
CRTs are irrevocable trusts designed so that initial payments are made to one or more noncharitable beneficiaries (such as a child) during their lifetimes. After the beneficiaries have passed away or a designated time period has lapsed, the remainder of the trust assets will go to charities. CRTs are tax-exempt entities.
CLTs are irrevocable trusts that provide payments to charitable beneficiaries for a specific time period. When the time period has elapsed, then the remaining trust assets will be distributed to noncharitable beneficiaries. These beneficiaries can be individuals, trusts, estates, partnerships, or corporations.
CRTs and CLTs are effective vehicles in that they provide a benefit both to loved ones and to charities. Best of all, they both have important tax implications so that more of your money goes where you want it to. If you are interested in giving back monetarily to charitable organizations, make sure to discuss the best options for you with an Estate Planning attorney who has a focus on charitable efforts. It is a wonderful gift to contribute to organizations that provide important services and support to causes you care about.