The holidays are here. If you have the financial resources to provide a comfortable life for your family, you have reason to be thankful. And if you can afford to share some of your “bounty” with charitable organizations, you may want to be as generous as possible — because your gifts may allow you to both give and receive.
By donating cash or other financial assets, such as stocks, to a qualified charity (either a religious group or a group that has received 501(c)(3) status from the IRS), you help benefit an organization whose work you believe in — and, at the same time, you can receive valuable tax benefits.
To illustrate: If you give $100 to a qualified charity, and you’re in the 25 percent tax bracket, you can deduct $100, with a tax benefit of $25, when you file your 2013 taxes. Therefore, the real “cost” of your donation is just $75 ($100 minus the $25 tax savings).
Furthermore, if you donate certain types of non-cash assets, you may be able to receive additional tax benefits. Suppose you give $1,000 worth of stock to a charitable group. If you’re in the 25 percent bracket, you’ll be able to deduct $250 when you file your taxes. And by donating the stock, you can avoid paying the capital gains taxes that would be due if you had eventually sold the stock yourself.
To claim a charitable deduction, you have to be able to itemize deductions on your taxes. Charitable gifting can get more complex if you choose to integrate your charitable giving with your estate plans to help you reduce your taxable estate. The estate tax is consistently debated in Congress, and the exemption level has fluctuated in recent years, so it’s not easy to predict if you could eventually subject your heirs to these taxes. Nonetheless, you can still work with your tax and legal advisors now to take steps to reduce any possible estate tax burden in the years ahead.
One such step might involve establishing a charitable remainder trust. Under this arrangement, you’d place some assets, such as appreciated stocks or real estate, in a trust, which could then use these assets to pay you a lifetime income stream. When you establish the trust, you may be able to receive a tax deduction based on the charitable group’s “remainder interest” — the amount the charity is likely to ultimately receive (this figure is determined by an IRS formula). Upon your death, the trust would relinquish the remaining assets to the charitable organization you’ve named. Keep in mind, though, that this type of trust can be complex. To establish one, you’ll need to work with your tax and legal advisors.
Of course, you can also choose to provide your loved ones with monetary gifts while you’re still alive. You can give up to $14,000 per year, per individual, to as many people as you choose without incurring the gift tax. For example, if you have three children, you could give them a cumulative $42,000 in a single year — and so could your spouse.
The holidays are a fine time to show your generosity. And, as we’ve seen, being generous can be rewarding — for your recipients and yourself.
• This article was written by Edward Jones for use by Ahwatukee Foothills Edward Jones Financial Advisor Joseph B. Ortiz, AAMS, CRPS. Reach him at (480) 753-7664 or email@example.com. Accredited Asset Management Specialist and AAMS, Chartered Retirement Plans Specialist and CRPS are registered service marks of the College for Financial Planning.