Tax-Smart Ways to Give

Maximize your tax benefits when giving to the causes you love

Helping others has numerous rewards, so it's no surprise that a number of studies have found that people give to nonprofits for altruistic reasons, rather than because it lowers their tax burdens. You likely aren't driven to support the causes that matter to you because of tax advantages, but with planning, there are many ways you can maximize your tax benefits when giving to the causes you love.

Consider these easy tips.

  1. Long-term appreciated assets — If you donate long-term appreciated assets like bonds, stocks, or real estate to charity, you generally don’t have to pay capital gains, and you can take an income tax deduction for the full fair-market value. It can be up to 30% of your adjusted gross income.
  2. Combine multi-year deductions into one year — Many taxpayers won’t qualify for the necessary deductions to surpass the standard deduction threshold established by tax reform in 2017. However, you can still receive a tax benefit by “bunching” multiple years’ worth of charitable giving in one year to surpass the itemization threshold. In off-years, you take the standard deduction. 
  3. Donor Advised Fund — A Donor Advised Fund is a dedicated account for charitable giving, as described below. When you contribute to a nonprofit that sponsors a Donor Advised Fund program, such as the Sacramento Region Community Foundation, you are eligible for an immediate tax deduction. You can then recommend grants over time to any IRS-qualified public nonprofit and invest the funds for tax-free growth. Donor Advised Funds provide many benefits for organizing and planning giving, but they also offer advantages in terms of income, capital gains and estate taxes. In some cases, these benefits are more advantageous than those from contributing to a private foundation.
  4. Estate Planning — By naming your charitable fund at the Sacramento Region Community Foundation in your will or as a beneficiary of a qualified insurance policy, retirement plan or trust, you reduce or even eliminate the burden of estate tax for your heirs. Your fund continues to support the charities you love and your legacy lives on. It is important to consult your tax and estate planning advisors regarding modifications to your estate plans.

Learn more about legacy giving

There may be opportunities to reduce your taxable income that you haven’t taken full advantage of—and a charitable fund at the Sacramento Region Community Foundation can help.

Defer or Reduce Taxes with Charitable Giving

By using the proper tax planning strategies, charitable contributions can reduce three kinds of federal taxes: income, capital gains and estate taxes.

  • Income tax strategies — Donations to 501(c)(3) public charities, including funds at the Sacramento Region Community Foundation, qualify for an itemized deduction from income. Because the tax rate is then applied to a reduced income, this can minimize your overall tax liability. Many donors don’t realize that there are a variety of ways to maximize this seemingly straightforward deduction. For instance, you can “bunch” your charitable contributions in a single tax year, using a Donor Advised Fund, to increase the amount you donate in a high-income year, and then the funds can be used to support charities over time. Or you can make a combined gift of appreciated assets and cash to maximize your benefits.
  • Capital gains tax strategies — You can use charitable contributions to reduce your capital gains tax liability by donating long-term appreciated assets. Not only can you deduct the fair market value of what you give from your income taxes, you can also minimize capital gains tax of up to 20%. Assets subject to capital gains taxes can include investments like stocks or mutual funds, or hard assets like real estate. They can include assets that are both publicly traded or non-publicly traded. For example, some givers donate shares of a private business before it is sold to dramatically increase their charitable impact.
  • Estate tax strategies — The federal estate tax is a tax on the transfer of your property at your death. By making properly structured gifts and donations, you can remove assets from your estate before the total is tallied and taxed. In fact, you have an unlimited charitable deduction if your estate plan makes gifts to charities. Charitable tax strategies for estate planning purposes can be among the most complex, and it typically makes sense to consult a professional. (We regularly work with many through the Philanthropic Advisors' Forum of Greater Sacramento.) Commonly used strategies include the use of charitable trusts and careful selection of assets for distribution to various beneficiaries—charitable and otherwise. For example, leaving an IRA to charity and appreciated securities to individuals might allow your heirs to inherit more because of the differences between how these assets are taxed.

Reduce Your Taxable Income By Thinking Beyond Cash

Tax-advantageous giving often comes in forms beyond cash gifts. We work with many people who look at their portfolios with an eye toward donating long-term appreciated securities (stocks, mutual funds, bonds), real estate, private company stock, and other potential investments. For example, if you give highly appreciated stock or real estate that you have owned for more than one year to a nonprofit (like the Sacramento Region Community Foundation), you may receive a double tax savings when donating the asset to charity: You won't pay capital gains tax on the appreciation in the property, plus you'll receive a charitable deduction for the fair market value of the asset given.

Why? Capital gains taxes are eliminated when you contribute long-term appreciated assets directly to a nonprofit instead of selling the assets yourself and donating the after-tax proceeds. As the example below illustrates, making a donation of stock rather than cash can result in a greater tax deduction for you and a greater contribution to the causes you care about:

Donate Stock   Donate Cash
$20,000 Value of stock when purchased $20,000
$50,000 Current price $50,000
$0 Capital gains and Medicare surtax
paid on $30,000 (23.8%)
$7,140
$50,000 Total contribution to nonprofit
(after deducting federal taxes)
$42,860
$18,500 Income tax savings by making contribution $15,858

This chart assumes that the donor is in the 37% federal income bracket. State and local taxes and the federal alternative minimum tax are not taken into account. As always, consult with your tax advisor to guide you toward the optimal decision.

With a charitable fund at the Sacramento Region Community Foundation, giving stock is simple: After you've opened a charitable fund, just complete a Stock Transfer Form with your broker and send a copy to us. We'll ensure the funds are made available for you to grant to the causes you care about.

Tax-Smart Strategy: Combining Cash and Securities

While donating appreciated securities typically eliminates long-term capital gains exposure, you are limited to 30% of your adjusted gross income (AGI) for deducting contributions of long-term appreciated securities. This is sufficient for most people, but there are some years when you might benefit from a larger current year deduction. In those situations, you may choose to supplement a charitable gift of securities with a charitable contribution of cash. This strategic combination of giving is an opportunity to reduce your taxable income.

Tax-Smart Strategy: Rebalancing Your Portfolio Philanthropically

Many investors perform routine portfolio rebalancing to ensure that their investment mix is consistent with their goals. Often this involves selling investments that have done well, which generates capital gains taxes in the process. One simple offsetting measure is aligning your charitable giving with the rebalancing process. Instead of writing a check to a favorite nonprofit this year, consider donating your most highly appreciated security, which you've held for over a year. Capital gains taxes typically will not apply to you or the nonprofit receiving the donation, and because you didn’t write a check, you may have cash available to purchase more stocks as part of your rebalancing exercise.

When you open a Donor Advised Fund, you can make a single large donation to the fund and then grant those funds to your favorite causes over time.

Learn more 

Consider the Benefits of a Charitable Fund

Whatever assets you choose to give, establishing a charitable fund like a Donor Advised Fund at the Sacramento Region Community Foundation is a simple, tax-effective way to dedicate money to charitable giving: When you make a donation of cash or other assets, you become eligible to take a tax deduction for your charitable gift. Then, you recommend which qualified nonprofits you'd like to support. The timing is flexible, as are the number of charitable causes you can support—as many as you like! Our team processes the grants and sends the checks to your chosen organizations, taking care of all the administrative work for you.

If you want to give to multiple nonprofits, a Donor Advised Fund is an especially well-suited option. When you open a Donor Advised Fund, you can make a single large donation to the fund and then grant those funds to your favorite causes over time. Conveniently, all you need to keep is the single receipt of your gift, simplifying your tax filings even as you continue to support any number of nonprofits that matter to you. 

Learn about opening a donor advised fund

Tax-Smart Strategy: Bunching or Bundling Your Gifts

As mentioned above, if the gift (or gifts) you make to your Donor Advised Fund reaches the threshold to make itemizing your tax return an attractive option, you can take the charitable deduction for that tax year and retain flexibility in your giving into the future — a strategy called "bunching" or "bundling" that has grown more common in recent years.

Accelerating your charitable giving and donating two years of contributions in one year can go a long way to helping you reach the threshold. Many of our donors choose to bundle donations to their charitable funds in a specific year while limiting donations in the subsequent year, essentially alternating tax strategies between itemization and standard deduction. In doing so, donors can reap the benefits of philanthropic giving while also receiving beneficial tax deductions and nonprofits retain their typical level of donated support.

Tax-Smart Strategy: Establishing a Charitable Fund Before Retirement

Establishing a Donor Advised Fund before you retire is an easy, tax-efficient way to make charitable giving a priority in retirement. There’s potential for a more immediate benefit as well: substantially offsetting your current taxes.

If your tax bracket is higher now than what you expect it to be in the future, consider frontloading your charitable giving by making a large contribution to a Donor Advised Fund now, rather than smaller gifts in retirement. Not only will you gain the possibility of tax savings in the present year, but you’ll also have charitable contributions set aside to recommend as future grants, allowing you to continue supporting charities generously on a fixed income—at a point in your life when you have more time to focus on philanthropy.

Tax-Smart Strategy: Complementing Your Current Philanthropy

Even if you already have another charitable giving vehicle—such as a private foundation, a Charitable Remainder Trust or Charitable Lead Trust—there are tax advantages to complementing it with a Donor Advised Fund, or another of the charitable giving vehicles we offer.

Private foundations: Making contributions to Donor Advised Funds has many benefits when compared to giving to a private foundation. To start, the deduction limitations for charitable donations to a nonprofit, including a Donor Advised Fund at the Sacramento Region Community Foundation, are greater than those to a private foundation:

 

Donor Advised Fund at the Sacramento Region Community Foundation

Private Foundation

Cash 60% of AGI 30%
Long-term appreciated securities 30% of AGI 20%

And practically speaking, making a portion of your charitable contributions to a Donor Advised Fund frees you from time-consuming paperwork and due diligence, because we handle administrative tasks like confirming that all grants are made to qualified charities and for proper charitable purposes, and ensuring compliance with legal requirements.

How do popular giving vehicles compare?

Charitable Remainder Trusts and Charitable Lead Trusts: It's possible to have both a Donor Advised Fund and a Charitable Remainder Trust or a Charitable Lead Trust in parallel. A smart way to couple either type of trust with a Donor Advised Fund like those we offer is to make your fund at the Sacramento Region Community Foundation a beneficiary of the trust. This gives you flexibility in deciding which charities to support from your Donor Advised Fund, without having to pay an attorney to update the beneficiaries of the trust over time.

Tax-Smart Strategy: IRA Charitable Rollovers

If you are at least 70½, the law allows you to transfer up to $100,000 of your IRA assets each year directly to a qualified nonprofit such as the Sacramento Region Community Foundation through an IRA Charitable Rollover. Since the assets you transfer will not be recognized as income, they will not trigger federal income taxes today or estate tax in the future. If you are married, you and your spouse can each transfer up to $100,000 per year. Charitable IRA Rollovers cannot be made to Donor Advised Funds, but they can be made to a variety of other charitable fund types, and the Sacramento Region Community Foundation can help make the process easy.

Learn more about IRA Charitable Rollovers

Connect With A Philanthropic Advisor

As with any tax strategy, it’s a good idea to meet with a tax or financial planning professional experienced in charitable giving to go over your personal financial situation. We regularly work with many through the Philanthropic Advisors' Forum of Greater Sacramento.

In addition to a philanthropic advisor, we invite you to reach out to our team. We have been helping donors like you support their favorite charities in smarter ways for more than 35 years. We can help you explore the different charitable vehicles available and explain how you can complement and maximize your current giving strategy with a charitable fund. We are happy to help you find ways to give that fulfill your goals, bring you joy, and support the many wonderful organizations that are helping to make a better tomorrow in the Sacramento region. 

CONTACT OUR TEAM TO SCHEDULE A MEETING

 

The tax information provided is general and educational in nature, and should not be construed as legal or tax advice. Content provided relates to taxation at the federal level only. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Ready to Open a Charitable Fund?

We are here to help you simplify your giving and strengthen your impact. We look forward to helping make your philanthropy powerful and rewarding, creating the lasting change you want to see — in this community and beyond.

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