Strategies for Tax-Effective Charitable Giving

Published on: Jan 14, 2022 by Katie Rieger, CPA

Updated on: March 14, 2023

Some of the best charitable giving strategies benefit the organizations you hold dear and maximize your tax savings. Below are a few strategies that can not only minimize your taxes but can also help minimize potential estate tax as well.

Minimize Taxes With These Charitable Giving Strategies

Gifting Appreciated Assets

Donating appreciated assets to a qualified charity held for more than one year (such as real estate or publicly traded securities) can create significant tax savings.

Not only can you generally deduct the fair market value of the gift on your income tax return, but you also eliminate the capital gains tax you would have paid if you had sold the asset yourself and donated the proceeds. This maximizes the amount the charity receives.

Removing assets from your estate now can reduce estate taxes. One of the downsides to this type of donation is many charitable organizations lack the resources necessary to accept them, which is why appreciated asset gifting is commonly used in conjunction with one of the following two strategies:

Donor-Advised Funds

A donor-advised fund acts almost like an investment account with the sole purpose of supporting charitable organizations indicated by the owner of the fund. Cash, securities, or other assets donated to the fund are held at a financial institution, with distributions from the fund going to charity.

The assets held in the fund are allowed to appreciate and accumulate earnings tax-free, outside of your estate. This enables you to avoid any tax owed on those earnings and provides additional funds to donate to your desired charities. You are generally eligible to take a charitable deduction in the year the assets are transferred.

Charitable Remainder Trusts

A charitable remainder trust is set up by gifting cash or other assets into an irrevocable trust. The donor or other beneficiary then receives regular income payments from the trust for a set number of years or for life. The charity named in the trust receives the remaining trust assets at the end of that time period.

Like a donor-advised fund, you can generally take a charitable deduction in the year the assets are transferred to the trust, and assets held in the trust are not considered part of your taxable estate. The payments you receive from the trust are subject to income tax and come back into your estate, but any income held in the trust and not paid out is tax-free.

THE WHAT, WHY, AND HOW OF TRUSTS

Charitable Bequests

Charitable bequests are gifts of a specific sum of money or a specified asset listed in your will, with the donation occurring after your death. While you can’t take a charitable deduction during your lifetime, this can be a great way to reduce your taxable estate, as any asset gifted in this way is not considered part of your estate.

This strategy can be helpful if you would like to retain complete control of an asset up to your death, but still wish to have a meaningful impact on your desired charities and lower any potential estate tax.

THE DEFINITIVE GUIDE TO BUSINESS TAX CREDITS AND DEDUCTIONS

Which Strategy is Right for Me?

Many strategies exist, but it can be challenging to find the one that best optimizes your estate, income taxes, and charitable giving goals.

All the previous strategies have significant estate tax or income tax benefits, but there are pros and cons to all of them. Contact your tax advisor at SVA to determine which strategy is right for you.

Share this post:

Biz Tip Topic Expert: Katie Rieger, CPA

Katie is a Manager for SVA Certified Public Accountants, with expertise in tax compliance and planning for individuals, businesses, and trusts. She works closely with business owners and trustees to advise them on tax issues and best planning practices for the changing tax environment. She also assists them with tax return preparation and multi-state tax compliance.

Get Weekly Biz Tips Delivered Straight to Your Inbox!