Guest post by Angie Morris, CPA, Hawkins Cloward and Simister
Often we desire to share our good fortune by contributing to charities for those in need. With tax season underway, you may be evaluating the charitable contributions you made last year and figuring out how you want to make contributions this year. While we tend to donate for altruistic reasons, there is also a tax benefit for making charitable donations. The method through which you gift determines your tax benefit. There are several ways to make a gift to a charitable cause, so which one is right for you?
IRS-approved charity. One of the easiest and most common ways to donate to charity is by giving directly to an IRS-approved charity. Donating in this manner allows you to take a tax deduction based on the fair market value of the gift. Through direct giving you choose the charity, amount and timing of the contribution. A tax deduction for a cash gift would be limited to 50% of your adjusted gross income (AGI) and 30% for securities held more than a year.
Private foundation. If you want to maintain control over investment and grant making decisions, a private foundation may be an effective way for you to donate. A private foundation is an independent charitable corporation, with tax-exempt recognition by the IRS. Private foundations are heavily regulated by the states and the federal government. You will need to follow the compliance requirements including annual distributions and information reporting to the IRS. Individuals that create private foundations often involve their family members with the management of the foundation. Foundations can be costly to establish and operate; therefore, a donation to establish the foundation is usually a significant amount. The tax deduction will be based on the fair market value of the gift. Private foundations have a 30% AGI limit for cash gifts, and 20% for securities held more than one year.
Charitable annuity trust or charitable remainder trust. A charitable annuity trust and charitable remainder trust are a way to leave funds to a charity while receiving a stream of income over your life or a set period of time. An agreement is reached with the charity to leave the remainder of the assets to the charity, but you get income during your lifetime. An annuity trust will give you a fixed amount of income annually, a remainder trust will give you income for a set period of time; once you pass away the charity will keep the remainder of the assets. There are reporting requirements with these types of trusts. The tax deduction will be based on the fair market value of the estimated assets remaining that go to the charity. These types of donations usually involve higher funding amounts.
Donor advised fund. A donor advised fund is a separate account maintained by a public charity that allows you to donate and accumulate funds, and recommend grants. Once you make the donation, the organization has legal control over the funds, but you have advisory privileges on the investment and distribution of the funds. Distributions must be made to public charities. These types of funds are designed as a simple, accessible, and less expensive alternative to a private foundation. There is usually a minimum amount you must contribute to set up the account. The tax deduction is 50% AGI for cash gifts and 30% AGI for securities held over a year.
There are a variety of ways to transfer assets to a charity. Comparing the different options before deciding will ensure that you choose the best for you. Some aspects to consider are the tax benefits, cost and complexity to establish and maintain and input you can have on the investments and charitable giving. Once you compare and contrast the options you can determine the best tool to suit your charitable giving goals.
Angela A. Morris graduated from Brigham Young University. She is a member of the AICPA and the UACPA. She has served as the treasurer of the Utah Association of CPAs and president of the UACPA Southern Chapter. She is currently the vice chair for the Housing Authority of Utah County, the treasurer of the Utah Valley Chamber of Commerce Women’s Business Network, and on the executive board for the Utah Valley Chamber of Commerce. Angie loves spending time at Lake Powell and is a devoted St. Louis Cardinals fan.