Three factors that impact the value of your year-end gifts
The methods, charities, and assets you choose affect your tax deduction
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In just a few days, families and friends across the U.S. will gather to give thanks for the blessings in their lives and remember those who are less fortunate. Being grateful and giving back are the two themes for Thanksgiving Day—and for the holiday season.
It’s also a perfect time to talk with your loved ones about how you intend to use charitable gifts to make a difference by contributing to disaster relief, helping the homeless in your own community, funding research for medical breakthroughs, or giving to specific causes that are particularly meaningful to you.
But this year, with uncertainty about pending tax legislation very much in the news, is there any reason to change your approach to giving back? “Definitely not,” says Liza Connelly, J.D., LL.M., Managing Director, Senior Trust Officer at Boston Private. “Although some of the tax law changes being proposed could affect the deductibility of charitable gifts in 2018, they won’t apply to the taxes you pay for this year. So it’s best to base your decisions on what’s in place now and not speculate about what could happen in the future.” To keep up with the latest developments, visit our A View from Washington series with exclusive insights from Washington policy expert Doug Fisher.
That said, there are three factors she suggests you keep in mind as you make your giving decisions before year-end 2017: the method you use, the organizations you choose, and the type of asset you’re donating. “It’s important to know the rules that apply since not all charitable gifts are treated in the same way when it’s time to file taxes and get the benefit of a charitable deduction,” Connelly says.
The way you donate can make a big difference
More people are using Donor Advised Funds (DAFs) in their giving strategy because these accounts are private, easy to open, and flexible. They also provide donors with plenty of time to decide which charities they want to support and how much they want give to each of them. Investors who have highly appreciated securities can also use DAFs as a temporary “parking place” for donating those securities—without having to pay taxes on any gains—while they decide which individual charities to fund later on.
Of course, you also can make gifts directly to a charity (using a check, credit card, or payroll deduction); through a private foundation or a Donor Advised Fund. Some of these giving methods will be better than others, depending on your personal situation. Your Boston Private advisor can help you identify which method is most appropriate for the money or assets you want to donate so you can maximize the impact of your philanthropy.
At the same time, it’s important to remember that any tax deductions you may be allowed to take for your charitable contributions could be limited by your adjusted gross income (AGI) – or phased out entirely once your AGI exceeds a certain level. “Fortunately,” says Connelly, “charitable gifts made in excess of any annual deduction limitation in 2017 can be carried forward and deducted from future income taxes for up to five years.” Make sure you check with your tax advisor to see if the potential to “carry forward” any excess charitable contributions may apply to you.
The charity you select determines how much you can deduct.
The amount the IRS allows you to deduct from your taxes for your charitable donations also depends on the type of charity you choose.
If your gift is made to a public charity or a DAF, the allowable deduction is limited to 50% of your adjusted gross income (AGI).
If the gift is made to a private foundation, the deduction is limited to the lesser of 30% of AGI or the remaining 50% of AGI after accounting for other donations.
The type of asset you donate affects its deduction value too.
Under current IRS rules, the amount of any charitable contribution you are allowed to deduct from your taxes also depends on the type of asset you donate and how long it has been held.
Cash donations made by check, credit card or payroll deduction are 100% deductible. (But remember, like all deductions, they are still subject to any limitations based on your AGI.)
Long-term stocks, bonds, and other capital gain property
For charitable giving purposes, the IRS defines capital gain property as: “Property for which you would have recognized long-term capital gains if you had you sold it at fair market value on the date of the contribution.” Capital gain property includes most assets or items of property you own and use personally and investments held for more than a year. Examples of capital assets are stocks, bonds, jewelry, coin or stamp collections, and cars or furniture used for personal purposes.
When you donate capital gain property, you can deduct its current fair market value, rather than its original cost basis, and you won’t be required to pay taxes on any gains. That’s why when you donate highly appreciated securities, you create a win/win for you and the charity. You get a worthwhile benefit by eliminating capital gains taxes, and the charity gets a significantly appreciated asset.
Short-term securities and other ordinary income property
Securities and property held for one year or less are considered ordinary income property for donation purposes if they would be have been taxed at the ordinary income tax rates if sold.
When you donate ordinary income property to charity, the value you can deduct is limited to your tax basis in the property, or what you originally paid for it. Examples of ordinary income property are business inventory, works of art or manuscripts created by the donor, and capital assets such as stocks and bonds or personal property held for one year or less.
Tangible personal property
For certain items of tangible personal property, such as artwork, different rules apply when determining the value of the gift for tax purposes:
- If the gifted property is related to the charity’s tax exempt function (such as a piece of art donated to a museum for its collection), the property is valued at its fair market value for tax deduction purposes.
- If the property is not related to the charity’s tax exempt function (such as a piece of art donated for a charity auction), the value of the gift is the property’s tax basis or original purchase price.
Cars, trucks, and vans
If you decide to donate a car, truck, or van directly to a non-profit charity and its fair market value is more than $500k, you can deduct the lesser of: the proceeds from its sale by the organization or the vehicle’s fair market value as of the donation date.
However, if the charity actually uses your vehicle to carry out its mission (for example an animal shelter that uses it to pick up stray cats) you can deduct the entire fair market value. (In this case you will need to report the transaction on a separate IRS Form 1098-C, attached to your federal tax return.)
Another way to give to charity in a tax-efficient manner is to put a Required Minimum Distribution (RMD) that you must take from your retirement accounts, but perhaps don’t need, to good use. If you’re over age 70½ and taking a RMD from IRA and/or 401(k) accounts, you can transfer up to $100,000 of that RMD directly to a qualified charity and avoid reporting the distribution as ordinary income on your tax return.
Please note: While an RMD rollover to charity can help you save on income taxes: 1) You are not allowed to take a charitable deduction for these rollovers, and 2) RMDs that are rolled over to a DAF will lose this special tax treatment.
Timing is everything.
As the end of 2017 approaches, be careful to watch the calendar. Depending on the type of asset you are donating and the method you choose, you’ll need enough time to plan for and complete the transaction by December 29 to ensure that the charitable gift applies to the current tax year. Talk to your financial and tax advisors and the receiving charity soon to get the gift underway.
How Boston Private can help.
Your Boston Private advisor can help you explore the charitable giving strategies that can work best for you and your family. He or she can help you create an annual plan for giving that is aligned with your long-term financial goals and reflects your philanthropic objectives but still meets your desire to make an immediate difference in the lives of others.
The opinions expressed and information contained in this article are given in good faith, may be subject to change without notice, and are as of the date issued. The accuracy and completeness of this information is not guaranteed. Since each client’s situation is unique, please review your specific investment objectives, risk tolerance and liquidity needs with your advisor before a suitable investment strategy can be selected.
- Family & Finance
- Financial Planning
- Personal Finance
- Tax Planning
- Trust & Estate