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Planning how you make charitable donations to the people and causes you care about can be just as important as what you give. Not only may you feel more gratified, but you could also reap some valuable tax breaks by having a well thought-out charitable giving strategy.
Charitable giving strategies
You probably have certain causes near and dear to your heart, whether related to health, arts and culture or social and economic issues. But just as important as supporting the causes you’re passionate about is making sure that the nonprofits you choose use your donations effectively and efficiently.
You need to research charities using reputable websites. Look for those with good reputations that put at least 75% of spending toward programs and services, rather than fundraising and other overhead costs. Many worthy causes have more than one nonprofit devoted to them, so don’t settle.
Also be aware that not all nonprofits qualify for charitable tax write-offs, such as some international charitable organizations. Get information on tax deductions for donations by searching for “EO Select Check.” Doing so brings you to a tool that will allow you to check an organization’s status.
If you’re not careful, you can end up mistakenly giving to the same charities and people multiple times a year or forget about donations that can be claimed as valuable tax deductions. Make sure to get receipts from charities for your donations and keep them in a file so they’re easy to find when you complete your tax return. For gifts to loved ones, keep track of who you give money to and when so you’re not needlessly triggering a requirement to file a gift tax return.
Many people automatically pull out their checkbook when it’s time to give. While cash gifts are quick, they may not be the best option. For instance, giving appreciated stock that you’ve held for more than a year to charity allows you to claim a tax deduction for its value without paying the capital-gains tax that would result if you sold it and donated the cash. If the stock or another appreciated asset is donated, the charity can then sell it so all the money will go toward its mission. Generally, giving appreciated assets to loved ones in lower tax brackets also allows them to sell the assets and pay less tax on the sale. For depreciated assets, it is generally better to sell them yourself to take the tax loss and then give away the cash. This is because you can’t transfer the tax loss to another person.
You can give up to $14,000 in 2017 (spouses can collectively give $28,000) to as many individuals as you want without triggering potential gift tax consequences or the requirement to file a gift tax return. That’s why it’s often good to spread giving over multiple years rather than lumping it all into one.
If you want to give more than that, there are exceptions to consider. Gifts that go directly to educational or medical institutions to pay for an individual’s tuition or health care bills are excluded from gift-tax and do not counts toward the annual gift tax exclusion for that individual. Moreover, you can make a one-time contribution to a 529 college-savings plan for up to five times the annual gift tax exclusion, or $70,000 as of 2017 (spouses can collectively give $140,000). You can do this without incurring gift tax consequences by electing to spread the contribution ratably over five years for gift tax purposes (making use of future years’ annual gift tax exclusions).
Naming a charity as beneficiary of a life insurance policy can make your charitable gift go further by leveraging premium dollars into a larger death benefit amount. Plus, if you retain ownership of the policy, you can change beneficiaries at any time for any reason. If you instead choose to gift full ownership to the charity so you no longer control the policy, you’ll gain a potential income-tax deduction. Also, if you continue to pay additional premiums, you can deduct those payments from your income taxes as charitable gifts.
You may have a lot of stuff consuming space in your attic or closets. Giving items rather than money has benefits. For one, you’re not hurting your personal cash flow by donating that old china set. However, you have to clean out your closets before Dec. 31 to claim a deduction for 2017. Remember that items generally need to be in good used condition or better. Also, here are a few things you’ll need:
Receipt or other reliable written document for anything valued at less than $250
Timely written acknowledgement with details of the donation for contributions of $250 or more
Qualified appraisal for donated items worth more than $5,000
Keep in mind that your time might be just as valuable as your assets; many charities are in dire need of volunteers around the holidays as well as year-round. (If you do volunteer, keep track of your volunteer auto mileage and expenses, as those may be tax deductible, too.)
Ultimately, giving shouldn’t just be part of your yearly financial planning. Charitable giving should be part of your life plan. The reason: You can designate charitable and personal gifts before you pass away, and in some cases, potentially reducing any estate tax bill.
A simple way to achieve this is designating a charity or person as beneficiary of specific accounts when permitted, such as your individual retirement account (IRA). But if you are willing and able to make a more sizeable gift, you may want to consider setting up a trust to benefit charitable or family interests. A charitable lead trust, for instance, provides income to charity today, while leaving the remainder to named beneficiaries; a charitable remainder trust pays income to you or your family for a period of years with the remaining principal going to the charities of your choice. You may also want to consider a dynasty trust to provide for future generations, for example, to pay for medical or educational costs. Making a donation while retaining a “life estate” allows you to donate a home or other property to charity and continue to use it during your lifetime — thereby avoiding the hassle of having your heirs sell it.
Another longer-term option for charitable giving is using a donor-advised fund, which allows you to claim a potential tax deduction today for funds you contribute to a charitable investment account that you can later make recommendations on how to allocate to nonprofits. Your Ameriprise financial advisor can help you explore these and other opportunities.
Charities often bombard people with emotional appeals during the holiday season. If you’re not careful, you could end up giving to ones that aren’t reputable, and you possibly won’t have enough left to give to the ones you really care about.
Work with your Ameriprise financial advisor to develop a well-rounded strategy for charitable and personal giving, including an approach that reflects your values and the kind of long-term legacy you want to leave for others. This doesn’t mean you shouldn’t give to the occasional door-knockers and bell-ringers — rather you should make sure you’re using your charitable dollars as effectively as you can.
Giving money to the causes and people you care about most is an important and rewarding part of life. Your Ameriprise financial advisor can help you ensure that you’re giving as effectively as you can.
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