Giving to Charity—4 Smart Strategies
November 6, 2013
For some, charitable giving goes beyond donating old clothes or writing the occasional check to support a favorite cause. It's part of a lifelong mission to help others and can be an integral part of one's investing plan. Four accounts that can help you make the most of your charitable giving include:
1. Charitable remainder trust
A charitable remainder trust (CRT) is a private fund that you set up and contribute to. It provides you or the beneficiaries you select with taxable income for a certain number of years, or for life. Money that's left over—the "remainder"—passes tax-free to one or more charities of your choosing.
Some features of a charitable remainder trust:
- You control the trust (or you can designate a trustee).
- Your contributions are tax deductible, based on the amount of money projected to go to charity.
- You can contribute cash, investments and property.
- If you want to diversify an over-concentrated position and avoid current income tax, contribute appreciated stocks, bonds and mutual funds.
- The income you receive is fixed or recalculated each year, depending on the type of CRT you set up. Either way, your annual income from the trust is capped, based on a minimum amount that must ultimately go to charity.
Setting up and maintaining a CRT takes some work. You need an attorney to draft the trust document, and you should consult a tax professional for the proper tax treatment, as well as for yearly reporting and compliance.
A planning tip for charitable accounts
If your income is unusually large in any one year and you have highly-appreciated stocks, bonds or mutual funds that you've held for over a year, consider donating them to one of these charitable vehicles.
Why? When you make charitable contributions, the amount you can deduct from your taxes is based on your income. So, making a large donation in a year when your income is higher than normal will do the most good from a tax perspective. If you have questions about choosing the best charitable account for your particular situation, talk to a tax professional.
2. Pooled income fund
Some public charities allow you to contribute to a pooled income fund (PIF), which works much like a CRT except the charity takes on the administrative chores for an annual fee.
- The charity pools contributions from different people, invests the proceeds and makes annual, taxable payments to you and other donors for life based on your contributions (and certain actuarial factors).
- Contributions are typically tax deductible, based on the money projected to pass on to the charity.
- As with a CRT, it often makes the most sense to contribute appreciated stocks, bonds and mutual funds.
- When a participant dies, the remainder interest goes to the charity.
3. Private foundation
A private foundation is a tax-exempt charitable organization1 that's set up and funded by a single person, or a group of individuals or businesses.
- Within limits, you can deduct contributions to a private foundation on your federal tax return.2
- In most instances, the foundation must distribute 5% of its value to charity each year, minus any tax it pays on investment income.
Private foundations involve set-up costs, ongoing compliance, rules against self-dealing and so on. If your net worth is very high, you have highly-appreciated stocks, bonds or mutual funds, and you want maximum control over your charitable endeavors—including having your name live forever in philanthropic history—a private foundation may be your best option.
4. Donor-advised fund
A donor-advised fund, such as the Schwab Charitable Fund™, is a pool of money managed by a charitable organization on behalf of many donors.
However, you direct your piece of the fund, including how the money is invested and which charities will get distributions from your part of the fund. And, you can name your donor-advised fund whatever you want (e.g., "The Smith Family Charitable Fund"). You receive a tax deduction in the year you contribute to your donor-advised fund, and the organization handles the set-up and compliance for an annual administrative fee.
Limitation on itemized deductions
Beginning in the 2013 tax year, the so-called Pease limitation (named for the Congressman who introduced it) on itemized deductions has been reinstated. Most itemized deductions, including charitable deductions, are reduced by 3% of adjusted gross income (AGI) over $250,000 for single filers and $300,000 for married couples filing jointly (up to a maximum total of 80% of itemized deductions).
It's important to keep in mind that the Pease limitation is driven by your income and should not be a disincentive for increased charitable giving. For example, assume a married couple filing jointly has an AGI of $350,000 with itemized deductions of $80,000 that include $25,000 of charitable contributions. Their AGI exceeds the $300,000 threshold by $50,000, so itemized deductions are reduced by 3% of $50,000, or $1,500. Therefore, of the couple's $80,000 of itemized deductions, only $78,500 is allowable as a deduction against taxable income.
Now, let's say the couple gives an additional $10,000 to a qualified charity, bringing their total charitable contributions to $35,000 for the year. The Pease limitation remains the same ($1,500) because it's based on AGI, not the amount the couple gives. In other words, it doesn't limit the tax benefit of additional charitable giving.
1. Net investment income may be taxed at 2%.
2. State rules may vary.
Learn more about how you can give with Schwab Charitable by visiting schwabcharitable.org.
Schwab Charitable Fund is recognized as a tax-exempt public charity as defined in Internal Revenue Code ("IRC") Sections 501(c)(3), 509(a)(1), and 170(b)(1)(A)(vi). The Fund is eligible to receive tax-deductible charitable contributions under IRC Section 170(c). The Fund has entered into service agreements with certain affiliates of The Charles Schwab Corporation.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
The tax information herein is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab Charitable recommends consultation with a qualified tax advisor or CPA.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.