Enjoying a successful career or owning a profitable business can enable a person to give some wealth back to the community where it was generated. If this describes you, consider the following pointers:
■ NEVER SELL APPRECIATED ASSETS IN ORDER TO MAKE CASH GIFTS
If you sell an asset in order to generate cash to make a charitable gift, you may rob the charity of a bigger gift and yourself of a bigger income tax deduction. There is a better way.
Let’s say you own property worth $100,000 that you inherited back in the ’70s when it was worth next to nothing. If you sell the property now because you want to make a big gift to your favorite charity, you may have to recognize a capital gain of $100,000 and pay $22,500 or so in tax on that gain. This will leave you with $77,500 to donate to the charity, for which you will get a deduction of $77,500.
While the tax deduction is nice and the gift is generous, what if you gave the property to your favorite charity and then the charity sold it? In that case, the charity would receive the $100,000 sales proceeds, and you would get a charitable deduction of $100,000. That’s a great deal for your favorite charity and for you.
There is an annual limit on how much you can deduct each year for gifts to charity, but you can carry forward the excess of what you gave over the amount you could deduct for up to five years. Even with the carry forward, if your gift is very generous, you might not be able to deduct the full amount of your gift.
■ YOUR TRADITIONAL IRA MIGHT BE A CHARITABLE GIFT CASH MACHINE
Once you reach a certain age (currently, 73, but this number may go up in the future), you have to take Required Minimum Distributions (RMDs) from your IRA so the IRS can collect some tax.
However, if you direct your IRA trustee to send your RMD directly to one or more charities, you will not have to pay tax on the RMD, up to $100,000 worth of charitable gifts per year.
Unfortunately, you will not get a deduction for your gift, but when you crunch the numbers, not having to recognize the RMD as income is usually a far better deal for you than being able to deduct your gift.
As pointed out above, there is a limit on how much of your RMD can go to charity without you being taxed on it. Moreover, you cannot apply future years’ RMDs against a current gift of IRA assets in excess of $100,000.
■ TALK WITH YOUR TRUSTED ADVISORS
Meet with your trusted advisors to discuss the best way to benefit your favorite charities that will also reduce your income tax.
There are lots of complicated rules to navigate, but making enhanced gifts to charity while reducing your income tax liability just might make the effort worthwhile.
And please remember that there are many more ways to make charitable gifts. Your trusted advisors can help you to explore them.
EST8PLANNING COUNSEL LLLC
Scott Makuakane, Counselor at Law
808-587-8227 | maku@est8planning.com
Est8planning.com
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