By Angie M. Stephenson, CPA, PFS, CFP
This past year has been dismal by almost any measure: unemployment, business profit margins, education, and physical and mental health concerns.
The good news is our communities continue to be held together through a network of amazing nonprofit organizations who have stepped up more than ever before to meet these challenges. There is an opportunity here for your clients who are inclined to be generous during the holiday season, as these very same organizations need vital assistance to continue to fulfill their missions, this year and in years going forward.
As you help clients review their charitable giving these last few weeks of the year, it’s wise to also consider their financial planning goals and the tax deductions available from their heart-felt contributions.
Here are a few options beyond the simple and easy cash gifts that you can share with clients.
Long-Term Appreciated Securities – There are two advantages to donating in this manner. Your client can deduct the market value of the security as their charitable contribution and avoid the capital gains tax that may be inherent in the transaction.
Donor Advised Funds (DAFs) – This may be a good technique if your client cannot itemize deductions for this tax year. Instead, they can contribute multiple years of planned charitable contributions into the DAF. Bunching contributions may allow your client to itemize deductions in the year in which the DAF is established and funded.
Here is an example: A married couple gives away $12,000 per year. Their only other itemized deductions are taxes, which are capped at $10,000. This means that the couple’s deductions would total $22,000 and not exceed this year’s standard deduction of $24,800. If the couple opens a DAF in 2020 and funds it with $24,000 (two years of their contributions), it will allow them to itemize deductions on their 2021 return. The couple can further leverage this gift by using appreciated securities to fund the DAF.
The couple can use the DAF to give to the charities just as they would have in 2020 and 2021, but the deduction will be bunched into 2021, allowing them to itemize and obtain a larger deduction over the two-year period. (Note that in 2021 the couple would still be able to claim the standard deduction and have a larger tax benefit over the two-year period.) Thus, if the couple establishes the DAF with funding of $24,000, then the itemized deduction in 2020 will be $34,000 and in 2021 the standard deduction of $25,100 will be used. In total their deductions will be $59,100, or $9,200 more than the $49,900 of standard deductions for the two-year period of 2020 and 2021. And if they fund the DAF with appreciated stock of $24,000 assuming that the unrealized capital gain on the stocks were $6,000, this means the couple would have also saved capital gains taxes on the $6,000 in addition to the charitable tax deduction.
Private Foundations – This option may be a consideration for higher net worth clients. It is a way to involve generations of family members in making charitable decisions. The tax rules are stricter and there are annual administrative costs to manage the foundation and to file tax returns that must be considered.
Other options to consider in a longer-term charitable giving plan include the following:
- Charitable Remainder Trusts – This is a great way to set up a trust where the donor may receive a stream of income during their life or term of years with the remainder going to charity. This does result in a partial tax deduction when the trust is established and funded.
- Charitable Lead Trusts – This is the opposite of the remainder trust. The trust will pay a stream of income from the assets to a charity. Funds left in the trust at the end of the trust term will be disbursed to noncharitable beneficiaries (family members).
- Pooled Income Funds – This option may be available through charities. This is similar to a charitable remainder trust, except smaller amounts can be contributed to a specific charity and the fund is managed by them. They will provide you with an income stream with the remainder staying with the charity.
Planning for charitable giving can take various forms. It is not a one-size-fits-all. A client’s facts and circumstances must be carefully considered together with the tax results to decide how to best achieve the charitable giving plans.
Angie M. Stephenson, CPA/PFS, CFP, is partner, senior wealth adviser, and chief operating officer for Domani Wealth LLC in Lancaster, Pa. She can be reached at firstname.lastname@example.org.
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