You don’t need to be a multi-millionaire to make a difference.
As the year ends, you might be thinking about making a gift to your old school or a charity – especially if you dislike taking Required Minimum Distributions (RMDs) from your IRA. After all, your altruism has the potential to bring you a tax break.
Do you have to make a multimillion-dollar gift to receive immediate or future financial benefits? No. If you’re not yet a millionaire or simply a “millionaire next door”, consider the following options which may bring you immediate or future tax deductions.
Partnership gifts. These gifts are made via long-term arrangements between donors and recipient charities or non-profits, usually with annuity-style income coming to the donor and an eventual transfer of the principal to the charity at the donor’s death.
If you’d like to supplement your retirement income with fixed annual payments that are partly tax-exempt, you might want to look at a charitable gift annuity. If you are retired, converting some fully taxed investments into charitable gift annuities may even help you lower taxes on Social Security benefits.1
A charitable remainder trust also allows you to pay yourself a dependable income (typically for life) and then distribute the remaining trust principal to charity. A charitable lead trust offers you the potential to reduce gift and estate taxes on assets passing to your heirs by making annual charitable gifts; your beneficiaries get the leftover trust assets at the end of your life or the specified trust term. You could even name a charitable life income arrangement as the beneﬁciary of your IRA.2
If you don’t have enough funds to start such a trust or annuity, you might opt to invest some of your assets in a pooled income fund offered by a university or charity. Your gifted assets go into a “pool” of assets invested by a fund manager; you get a pro rata share of the income of the fund for life, and when your last income beneficiary passes away, the principal of your gift goes to the school or charity.
If you like the idea of a family foundation but don’t quite have the money and don’t want the bureaucracy, you could consider setting up a donor-advised fund. You make an irrevocable contribution to a third-party fund, realizing an immediate tax deduction; the fund invests the money in an account you create. You advise the fund where the money goes and how it grows, but the fund makes the actual grants to nonprofits.
Lifetime gifts. These are charitable gifts in which the donor retains no powers or other controls over the gift once it is made. A lifetime gift of this sort is not included in what the IRS calls your Gross Estate (but taxable gifts are used in calculation of estate tax).3
An IRA charitable rollover (allowed for 2008 and 2009, and possibly beyond) lets an individual age 70½ or older directly transfer up to $100,000 from an IRA to a charity, school, or other qualified non-profit. An IRA gift can reduce your taxable income by as much as $100,000, as the rollover amount is excluded from your adjusted gross income (AGI) for the year in which you make the gift.4 In some cases, IRA charitable rollovers may even reduce income taxes on Social Security benefits.
Lifetime gifts also include outright gifts of cash or appreciated assets such as stocks or real estate. A gift of appreciated stock could bring you a charitable deduction to lower your income tax, and help you avoid capital gains tax linked to the sale of the appreciated shares.5
Through a gift of appreciated property, you can transfer a real estate deed to a school or charity and get around capital gains taxes that may result from a property’s sale. You could even arrange a retained life estate, in which you deed your home to a charity or non-profit while retaining the right to live in it as your primary residence for the rest of your life.
Estate gifts. These are deferred gifts you make after your lifetime, without impact on your current lifestyle. You can make a bequest to a charity through your will or a living trust without incurring estate taxes on the gift amount.5 A gift of life insurance to a university or charity can give you an immediate income tax deduction for the cash surrender value of a paid-up policy, and possible future deductions. Additionally, the cash value of the policy could be used to fund a gift annuity.6 You can also make an IRA gift or retirement plan gift effective upon your death, with the non-profit organization receiving some or all of the assets as you wish.5
The caveats. As your income increases, you may face limits on the amount of charitable gifts you can deduct. If you are retired, an increase in income can also cause more of your Social Security benefits to be taxed. The IRS says that your charitable deductions for any tax year can be more than more than 50% or your adjusted gross income (possibly 30% or 20% depending on the specifics of your gifts). But if you exceed such limits, the IRS lets you carry forward excess contributions for up to five years.7
Would you like to learn more? Okay, so they may not name a hospital wing or a library after you. But your charitable giving can have real effect even if you don’t have a fortune. Keep in mind that your unique circumstances need to be weighed before making any decision. As with all tax and estate planning, please consult your financial advisor, attorney or tax advisor to affirm that you are in a position to fully benefit from charitable deductions.
1 minnesota.publicradio.org/support/planned_giving/gift_annuities.shtml [12/5/08]
2 alumni.cornell.edu/gift_planning/additional_charstrategies.cfm [12/4/08]
3 irs.gov/businesses/small/article/0,,id=108143,00.html [12/4/08]
4 case.org/Content/Miscellaneous/Display.cfm?contentItemID=6175= [10/6/08]
5 minnesota.publicradio.org/support/planned_giving/gift_comparison.shtml [12/5/08]
6 redcrosslegacy.org/GIFTinsurance.php [12/4/08]
7 irs.gov/pub/irs-pdf/p526.pdf [TY 2007]