The idea of “planning” a gift to charity may not spring as readily to mind as investment or retirement planning. Yet there are many ways to give, and many kinds of gifts to consider, especially when philanthropy is one of your core values.

CARES Act changes

Before proceeding, it is important to understand three important tax changes that apply for this year: 

• A $300 “above the line” deduction.Those who do not itemize their tax deductions (that is most people these days, because the standard deduction was roughly doubled beginning in 2018) may nevertheless claim a $300 adjustment to income for cash contributions to charity.
• The ceiling has been raised. The cap of 60% of Adjusted Gross Income (AGI) for the charitable deduction has been boosted to 100% of AGI for cash contributions to charity.That means one can fully zero out one’s federal income tax liability this year.
• QCDs are still available. Those who are 70½ or older may direct up to $100,000 from an IRA to a qualified charity (a Qualified Charitable Distribution, or QCD).This rule has not been changed.The QCD will qualify as a Required Minimum Distribution (RMD), and those rules have changed. RMDs are not mandated for 2020. Still, the QCD may be a good choice for the charitably minded, because the amounts so transferred are not included in income, which can have other tax benefits.

Initial steps

Of course, the very first step in your planning is to identify the object of your philanthropy. Then consider what you intend your gift to accomplish: how you would like your gift to make a difference both in general and specific terms. At this point you probably will make contact with the director of development at your chosen charitable organization to discuss your gift.

With the procedural steps out of the way, creativity begins. How can you shape your gift? For instance, your gift need not be cash (except that non-cash gifts do have a lower deduction limit). You may own certain assets that you may want to donate, and your charity will be more than glad to receive.

Gifts of property

Generally, your federal income tax deduction for your gifts to charity is the fair market value of the transfer. There’s a tax bonus when you make a gift of a long-term capital asset that has appreciated in value during the time that you owned it.

Here’s how it works: You plan a substantial gift and are considering selling some securities that you have owned for years which have grown significantly as the means to fund the gift. You’ll pay a long-term capital gain tax on the sale and then can pay what’s left over to your charity. If you make a gift of the securities themselves, you will pay no capital gain tax. The charity can sell the securities without incurring any tax. You also will be entitled to an income tax deduction for the fair market value of the gift of securities (limited to 60% of AGI).

Another creative approach is to make a gift of personal property, such as a work of art or valuable collectibles. You can deduct the current market value of a gift of appreciated personal property, but there is an important caveat: If the contributed property is related to the exempt purpose of the organization—rare books to a library, for instance—the full deduction is available. However, if the property is unrelated to the charity’s purpose—the books to a hospital to sell and use the proceeds—your deduction is limited to the property’s cost basis.

Gifts of real estate

For some people a gift of a parcel of land held for many years that has appreciated significantly in value may be an especially attractive candidate for a gift to charity.

As with other appreciated property, you will have the opportunity to take an income tax deduction for your charitable contribution equal to 100% of the property’s fair market value, which, if you have held the property for some time, may be substantial. In addition, you pay no capital gain tax on the past appreciation. An added bonus: You are reducing your taxable estate by the value of your gift.

If you would rather take a “wait-and-see” approach, you can make the real estate gift as a bequest in your will. Although you receive no current income tax deduction, your estate receives a full deduction for the real estate’s fair market value at your death.

Gifts in trust

Fashioning your gift in trust adds a great deal of flexibility to your gift giving.

There are many ways to establish your trust. For example, you may set up your trust during your lifetime or through provisions in your will. You can arrange for the trust to provide you with income from the trust for your life, or income for someone whom you name in the trust document. You can provide for the gift of income to yourself or the named beneficiary or beneficiaries for a period of time or for life, followed by a transfer to the charity (a charitable remainder annuity trust, or charitable remainder unitrust); or the reverse—a gift of income to the charity followed by a transfer of assets to the named beneficiary (a charitable lead trust).

You may fund your trust with cash or be more creative by using the aforementioned appreciated securities, real estate, or perhaps a life insurance policy. When your donation is placed in the trust, you receive an income tax deduction for the charitable part of the gift.

You’ll need to cross all the “t’s” and dot all the “i’s” in order to reap all the possible tax benefits from a charitable gift in trust. Be sure to confer with your attorney, trust consultant, and the charity itself when considering any of these creative ways of giving.

(October 2020) © 2020 M.A. Co. All rights reserved.