Charitable donations are one of the ways you can support a specific cause or organization that is close to your heart. Financially, charitable donations can be an important part of organizing your finances and planning your taxes and finances as well.
1. Donor-Advised Funds
A donor-advised fund is a type of charitable donation where you contribute an irrevocable amount, whether cash or in securities, to a nonprofit organization of your choice. Grants from donor-advised funds to charities exceeded $34 billion in 2020.
2. Real Estate
If you have a property that you no longer use and would face a significant tax if you sold it, you may find that donating this real estate to charities is a good option. If you still live in the property you wish to donate, you can convert it into a charitable donation by transferring the title to a charitable organization after your death.
3. Cash
Gifting a cash amount is the simplest form of charitable donations. Your tax deduction will equal the cash amount you donated, after subtracting the value of any goods or services received in return. For example, enrolling in nonprofit organizations, like a zoo or another organization, is considered a cash gift. Titles, certificates, or stocks are not transferred in the case of cash donations. The benefit of cash gifts is their simplicity, with no complicated deductions or tax benefits to deal with. The only thing you will need is a way to document the cash contribution. Tax law states that cash contributions, regardless of their size, cannot be deducted unless you have a record or receipt of the contribution.
4. Stocks
Donating appreciated securities like stocks is one of the most tax-efficient ways to give. There are two main advantages to donating in this way. First, because you do not sell your stocks, there are no capital gains taxes to worry about. The second benefit is that any stocks you purchased over a year ago that are currently worth more than their original cost can be donated and qualify for a tax deduction equal to the full fair market value of the stock.
5. Charitable Trust
There are two types of charitable trusts you may be interested in including in your financial plan – the Charitable Income Trust (CLT) and the Charitable Remainder Trust (CRT).
6. Assets
One of the main advantages of donating your assets, such as retirement accounts and life insurance policies, to charities is that in addition to any tax deduction on the charitable income, your estate will not have to recognize that donated income, giving you a break on estate tax. Many people also choose to use assets that typically have a tax liability on income and leave tax-deferred accounts to their heirs, giving them a nice inheritance that will not be taxed.
7. Donor Pooling Fund
If you are looking to generate income but wish to make smaller contributions to charities, a donor pooling fund may be the best option for you. You can “pool” a variety of securities and/or combine them with cash to create a larger amount of money to distribute to charities. Money is paid to you and any other beneficiaries who have pooled their assets into the fund. Upon your death, the remaining amount from the pooling fund is donated to charities. In some cases, you may be able to receive a charitable tax deduction equal to the expected amount the charity will receive.
8.
Private Foundation
Private foundations are charitable institutions established as charitable trusts or corporations. If you’re looking to establish your own charitable organization, a private foundation is a great way to involve family, especially if you have a cause that is very close to your heart. Although there are stricter rules and regulations and tax laws, a private foundation can award grants to individuals, and you can maintain control over the donated assets.
Key Takeaways
Before embarking on a charitable giving plan, it’s important to consider the financial and tax implications of doing so. From cash or property donations to donor-advised funds or charitable trusts, there are many options to consider when giving. Discussing options with your financial advisor, accountant, or money planning professional can help you choose the best option(s) for charitable giving so you can maximize your gifts and minimize potential tax consequences.
Source: https://www.thebalancemoney.com/types-of-charitable-giving-1289740
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