5 Ways to Offset Taxes with Charitable Giving

Although we’re all living through the same global pandemic, it has affected some of us more than others. By sitting on the boards of God’s Pantry Food Bank and the YMCA of Central Kentucky, I’ve seen how many in our communities are suffering economically. For instance, the need for food assistance in Lexington alone has increased almost 90% - many seeking help for the first time - since the pandemic hit. Similarly, as the Y never turns anyone away because they can’t pay – and there are more now than ever - donors’ contributions serve needs like helping kids attend summer camp and play in sports leagues.

Because of the changes to the federal tax code in 2017 most of us don’t itemize our returns anymore. If not, contributing cash offers no tax benefit. Here are some alternative ways to give and still benefit yourself at the same time:

1. Gift appreciated securities: If you own stock or even a mutual fund that has appreciated considerably since you purchased it, you may gift the shares directly to the charity. You will avoid paying any capital gains tax on the appreciated amount and you can deduct the current fair market value of the security on your return. The charity can then sell the security for cash and not pay capital gains tax either.
2. Qualified charitable distribution: You may donate money directly from your IRA to a charity if you are at least 70 1/2. Normally, when you take a withdrawal from your IRA you are taxed on that amount. If you donate to a charity directly from your IRA, however, you pay no tax. If you are already taking Required Minimum Distributions (RMDs) from your IRA, you get the double benefit of paying no tax and satisfying your RMD for the year. Note: Congress eliminated the need for RMDs during 2020 due to Covid-19.
3. Charitable Remainder Trust: If you’d like to gift to your favorite charity upon your death, you can establish a trust that provides you income during your lifetime and then transfers the assets in the trust to the charity at death. After transferring the appreciated asset to the trust – stock or even real estate – you can sell it and avoid capital gains tax. You deduct the donation from your taxes and reinvest the proceeds, which then provides the income throughout your lifetime.
4. Charitable Lead Trust: This is just the opposite in that the charity of your choice will receive the income during your lifetime and your chosen beneficiary will inherit the asset at your death. This is a good choice if you’d like to see the benefits of your gift in action during your lifetime.
5. Donor-advised fund: If you’d like to support several charities over time this may be a good option. You can contribute either cash or securities, receive a charitable deduction in the year you donate, and then the proceeds may be paid out over several years to several charities.

For unto whomsoever much is given, of him shall be much required – Luke 12:48.

Steve Byars, CFP®