It is important to give back with both time and money. If you are blessed with an abundance of either, then you should find a nonprofit with a mission that resonates with you personally and generously share your resources. There is no shortage of underfunded charitable organizations; it's just a matter of how much you can give. However, when you do contribute, it should fall within your overall tax and financial plan. Here are three types of contributors and some relevant tax saving strategies for each one:
You give what you can, but they are not putting your name on a building anytime soon. You have enough deductions (charitable contributions, mortgage interest, mortgage insurance, state taxes, medical expenses, etc.) each year to itemize, but just barely. In total, your itemized deductions are only a few hundred dollars more than the standard deduction, so you really aren't even getting credit for the contributions you make. One way to counteract this situation is to bundle your giving: hold contributions for year one until the beginning of year two. This strategy allows you to double your charitable giving in year two which will increase your itemized deductions. Since you were barely over the standard deduction to begin with, using the standard deduction in year one to create greater itemized deductions in year two is worth it.
You get a stack of letters every year from various nonprofits expressing their appreciation for your generous contributions and maybe you even buy a table or two at charitable events. You always utilize itemize deductions, and charitable contributions play a significant role in your tax planning. You may also have income that fluctuates, pushing you into higher brackets in some years than others. In this scenario, the objective in your charitable planning is to keep you out of the highest bracket (39.6%) in as many years as possible. To achieve this objective, you will not be able to simply set up a monthly bank draft for your tithe or other contribution. You have to match high contribution years with high income years.
You may also find yourself in a situation where you have level income but through receipt of an inheritance, life insurance payout, or other nontaxable event you have a desire to make a larger than usual charitable gift. In this case, it may benefit you to spread your giving out over a few years in order to keep you out of the top tax bracket for a longer period. The general rule is that you want to defer income and accelerate deductions for tax efficiency, but often the situation is more nuanced than that and requires analysis of what tax brackets is hit each year.
You have significant net worth and just as many people asking you for money as you do solicitations offering to manage it. Your wealth may even cause you to have an estate tax problem and require you to make large contributions to keep you below the estate tax exemption ($10.86M for married couples in 2015). In this situation, you will definitely want to consult your financial advisor and tax attorney to come up with a charitable giving strategy that will probably implement a private foundation or specialized trust, such as a CRAT or CRUT, in addition to your annual giving. These types of trust allow high net worth individuals to remove assets from their estate and recognize current charitable contributions while maintaining the income stream these assets may provide.
Even if your wealth does not exceed the estate tax exemption, there are other strategies useful to high net worth individuals. Contribution of appreciated stock to a charitable organization allows you to take a deduction for the full fair market value on the date of contribution without recognizing a gain. Additionally, if congress acts last minute like they did in 2014 to extend the rule which allows for qualified charitable distribution (QCD) from an IRA, those 70.5 and older can make charitable contributions directly from their IRAs to meet their required minimum distribution (RMD) for the year. This “extender” has not been renewed for 2015 but could be before the year is out.
Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.