You’ve probably heard that “generosity is its own reward.”
This may be true, but when you make a charitable gift to a non-profit organization, your generosity also can reward you — especially when you file your taxes.
In fact, you can get at least three types of tax benefits:
• Immediate tax deduction.
You can deduct your charitable gift from your current income taxes.
For example, if you give $1,000 in cash to a charitable group this year, and you are in the 28 percent tax bracket, you can deduct $280 from your taxes on your next tax return.
• Avoidance of capital gains taxes.
Instead of writing a check for $1,000 to a charitable group, you might want to donate appreciated assets, such as stocks.
Suppose you have been holding shares of a specific stock for several years. Let’s assume that you bought these shares for $250, and they are now worth $1,000.
If you were to give these shares to a recognized charitable group, you would get the $280 tax deduction based on the shares’ current market value.
Furthermore, because you were not selling the shares, you would avoid having to pay any capital gains taxes on the sale’s $750 profit.
• Potential reduction in estate taxes.
By removing an appreciated stock from your estate, you may be providing a tax break to your heirs, if your estate is large enough to generate estate taxes.
Under current law, today’s $1.5 million federal applicable exclusion amount (the amount you can pass on to your heirs, free of estate taxes) will increase over the next several years.
The federal estate tax will be repealed in 2010 and will return in 2011 with a $1 million exclusion, unless Congress passes new legislation.
Charitable Giving Methods
Depending on your circumstances, you might find it advantageous to establish a charitable giving vehicle, such as one of the following:
• Charitable remainder trust.
If you own a great many shares of an appreciated stock, you may want to donate some or all of them to a charitable remainder trust.
The trust can then sell the stock, reinvest the proceeds and pay you a lifetime income stream.
You’ll defer capital gains taxes on the sale of your stocks, and you can use the income to help diversify your portfolio or pay for some living expenses.
When you die, the remaining proceeds of the trust go to the charitable group that you have chosen in the trust.
• Private foundation.
If you have a very large estate, you may want to create a private foundation to distribute assets to charities. After you’ve established a private foundation, it will typically distribute 5 percent of the fair market value of its assets each year to the charities you’ve chosen.
Contributions to private foundations, unlike those made to charitable remainder trusts, do not allow for donors to receive an income stream.
Before establishing any of these charitable giving arrangements, consult with your tax and legal advisers. But no matter how you choose to make your charitable gifts, don’t hesitate to be as philanthropic as you can afford.
By helping out those organizations that do valuable work, you’ll unquestionably be making a good investment.
Scott Flake is a financial adviser with Edward Jones. He hosts a weekly informal investment discussion on Tuesdays at 10 a.m. at the Good Samaritan Majestic Rim at 310 E. Tyler Parkway. For more information, call (928) 468-1470.