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Understanding the Differences and Impacts of Charitable Giving

| September 24, 2021
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Donating to a charity of your choice equates to being personally invested in the health and promotion of an organization that aligns with your beliefs.

Whether personally drawn, philanthropically charged or financially driven, integrating charitable giving into your financial plan opens an opportunity to potentially benefit from tax break advantages while maximizing your stake in the impact a charitable organization can make, if your financial investment is assessed and executed properly.

Keeping in mind every financial situation is unique, let’s dive in to five gifting options to donate to charities and nonprofit organizations.

Cash and Appreciated Assets: Straightforward and simple - donate a gift of cash and/or appreciated assets. You’ve heard the saying, “cash is king,” and here’s why it applies when gifting. Nearly all charities and nonprofits accept cash and the benefit for giving cash is clear-cut. Plus, there are no confusing tax deductions or benefits to handle. Annual charitable gifts of cash can be deducted up to 60% of your Adjusted Gross Income (AGI).

Stocks and bonds offer another unfussy and tax-efficient way to give. Good to know that you’re not selling stocks when you gift them, so no capital gains taxes will be assessed. When donating shares of stock you are eligible for a tax deduction equal to the full fair market value of the stock. Here’s an example with thoughtful strategy employed – select a stock that appears heavily concentrated and appreciated in your portfolio and donate shares of it. The reward is twofold – you are generously contributing to a charity of choice and you are reducing risk in a tax-efficient manner. By donating instead of selling this stock, you are saving yourself from the capital gains tax liability that comes with selling the stock at a profit. When the gift of appreciated securities is made to a qualified charitable organization, the deduction is generally limited to 30% of your AGI or 20% if gifted to a private foundation. 

Qualified Charitable Distributions from IRA: For those who are 70½ years old or older and wish to make a charitable gift, a Qualified Charitable Distribution (QCD) deserves a look as it allows for a transfer up to $100,000 per year from your IRA directly to a charitable organization, while also satisfying your Required Minimum Distribution. RMDs are amounts that U.S. tax law requires an individual age 72 or older, or 70½ years old or older if born before July 1, 1949, to withdraw annually from traditional IRAs and employer-sponsored retirement plans.

With a QCD, you do not have to itemize income tax deductions to receive a tax benefit for your charitable contribution and the amount of your QCD is excluded from your gross income. Translation: you pay less in taxes. Depending on your filing status and top marginal rate, you end up with 100% pre-tax charitable deductions with a tax savings between 10-37%. In addition, QCDs are not subject to AGI limitations.

Popular among retirees who are not in need of their RMDs, QCDs offer a solution for those intent on making charitable contributions, while satisfying the distribution mandate. Allow us to keep you in the know and meet with your PCG Wealth Advisor regularly to discuss how QCD rules have changed due to recent tax legislation and the SECURE Act of 2020, in large part associated with the COVID-19 pandemic.

Donor-Advised Funds: A Donor-Advised Fund (DAF) is like a charitable investment account, but for the sole purpose of supporting charitable organizations you wish to support financially. In a DAF, you can donate a nonrefundable amount of either cash or securities (*helpful tip – Fidelity and Schwab offer a DAF*).  You then make charitable contributions directly from the DAF to charities of your choice. Fidelity or Schwab handles the administration of your contributions, such as check writing, tracking and reporting, and you can access the activity online. If you opt not to gift to charities from the DAF right away, your contributions to the account can be invested and grow tax-free until a grant is created. As an added bonus, you, the donor, receive an income tax deduction for the contribution(s) made to your DAF.

Charitable Lead Trust: A Charitable Lead Trust (CLT) is an irrevocable trust that allows for an individual to donate a stream of income from the assets of a trust to a charitable organization on an annual basis. Funds remaining at the end of the period, based on the established terms of the trust, can be disbursed to other beneficiaries, or held in the trust.

In a CLT, your gift tax deduction is immediate and based on the value of the income stream to the charity. A CLT favors dually by providing a steady stream of income to the charity of your choosing and serving as a planning tool periodically disbursing assets from a trust for tax purposes.

Charitable Remainder Trust: A Charitable Remainder Trust (CRT) is an irrevocable trust that is similar in setup to a CLT with a notable exception. A CRT pays an income stream to the grantor or other non-charitable beneficiary for a defined period of time first, and then pays the remaining value of the trust to the charity at the end of the term. Both the CLT and CRT designate administrative tasks to the trustee, who is responsible for preparing and filing tax returns, calculating the annual payout, and tracking various categories of income. Due to the expense of setup and maintenance plus estate tax advantages, CRTs and CLTs are typically used for larger amounts of contributions.

With a growing understanding of available options of contributing and donating to charities and nonprofit organizations, we encourage you to speak with your PCG Wealth Advisor about which charitable donation strategy works best for you, your family, and your unique financial situation. We appreciate that it is important for many to thoughtfully align your investments and generously practice the good deeds of donating, or investing, in the long-term health of nonprofits and charitable organizations. As your partner, PCG aims to collaborate with you to establish and meet your financial planning goals.

Enjoy the first weekend of fall and best wishes for health and safety during the season!


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