Understanding the tax advantages related to charitable contributions can help you decide how and when to give.
While there is no wrong way to give, there are different methods that may align with the donor’s personal circumstances to provide the maximum amount to charity while receiving the maximum tax advantages. Here are the four most common giving methods and the tax advantages associated with each.
The simplest option is to give a cash donation to your charity of choice. Cash donations can be made to public charities, private foundations or individuals. Cash donations are ideal for those looking for simple ways to give.
Tax advantages: Cash donations generally provide the highest charitable deduction opportunity with the ability to deduct up to 60% of adjusted gross income.
Highly Appreciated Assets
This method allows the donor to transfer an asset, such as stock, to a charity without the need to sell it first. The primary benefit to this giving method is the avoidance of any capital gains tax on the gifted asset. These donations can be made directly to public charities, private foundations or individuals.
Tax advantages: This strategy allows you to support your favorite charitable organizations while avoiding capital gain taxes on the appreciated asset and receiving a charitable deduction. Taxpayers can deduct up to 30% of adjusted gross income through gifting appreciated assets. These limits are reduced for donations to certain organizations, such as private foundations.
Donor Advised Funds
A Donor Advised Fund (DAF) is a charitable giving account funded by contributions of cash or securities, and sometimes illiquid assets. The donor can then make donations from the fund over time. They are fairly easy to administer and generally have nominal fees involved. Above a certain funding level, a DAF may also be managed by an investment advisor. DAFs may only be used to make donations to public charities or private operating foundations. They cannot make grants to private non-operating foundations or to individuals.
Tax advantages: Once a DAF is created, it provides the donor with an immediate tax deduction. This option can be ideal for individuals looking to receive a larger tax deduction in one year due to a wealth creation event such as the sale of a business or real estate. DAFs can also be used as a legacy giving tool for families who want to build a culture of giving.
A Private Foundation is a non-profit organization set up by an individual or a business for the purpose of charitable giving. They are typically funded with one large donation that is invested with income being distributed to a charity (or multiple charities) each year. Private Foundations are required to distribute a minimum of 5% of the prior year’s average net assets for charitable purposes each year in order to maintain their tax advantaged status.
Private Foundations can grant donations to any public charity and sometimes to a non-charity if the funds will be used for charitable purposes (although this option requires careful vetting to avoid a tax penalty from the IRS). These entities are more administratively onerous than other charitable vehicles, but Private Foundations may hire staff, reimburse expenses and provide donations directly to individuals in the form of scholarships or hardship assistance.
Tax advantages: Private Foundations, while income tax-exempt, are typically subject to a nominal investment income tax.
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Important Disclosures: The information contained in this document is for informational purposes only. This document is not a complete or comprehensive guide. Nothing in this document is intended to provide, and you should not rely upon it for, accounting, legal, tax, or investment advice or recommendations. We are not making any specific charitable giving recommendations and you should not make any giving decisions based solely on the information in this document. Every person is subject to unique considerations, and the options in this document are not appropriate for everyone. Please consult your Freestone client advisor and a tax professional regarding options specific to your needs.