Charitable Contribution Tax Planning

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Unlike many other tax benefits, tax deductions for charitable contributions are widely used by taxpayers with varying income levels and degrees of financial sophistication. Such deductions have a clear and simply implemented tax advantage as well as a well-defined societal benefit. Donors of cash and profit receive a tax deduction for the amount or fair market value of their donation while the charity to which the donation is made benefits from the use of the funds or property contributed to its charitable purpose. Although the basic the concept of taking a tax deduction for a charitable contribution is pretty straightforward, advanced charitable contribution tax strategies can be quite complex. Two such strategies commonly used to provide tax advantages to high income taxpayers and those involved in significant taxable transaction events are discussed below:

  • Charitable Gifts of Appreciated Property

    The donation of appreciated property provides a significant tax saving opportunity for certain high income taxpayers. When appreciated property is donated, the benefits are three-fold. The taxpayer donating the property receives a charitable deduction for the full fair market value of the gift and avoids paying capital gains taxes on the property’s increased value while the charity receives the benefit of the gift. Stock is probably the most widely utilized type of appreciated property donation. Although highly appreciated stock generally has been held for a long time giving it preferential tax treatment when it is sold, the seller of the stock may still incur combined federal and state income taxes of up to 35%. The direct gift of this appreciated stock allows the donor the combined benefits of completely avoiding the payment of capital gains taxes on the stock’s increased value in addition to receiving a charitable tax deduction for the full fair market value of the gift.

  • Charitable Remainder Trusts

    A second common charitable giving tax planning tool used by sophisticated taxpayers and advisors is the Charitable Remainder Trust. Although bequests to charities at the time of death are fairly common, a taxpayer approaching the end life is often in a lower income tax bracket than in earlier years, thus reducing the tax advantage of the donation. A Charitable Remainder Trust remedies this situation by giving the taxpayer the ability to make a future charitable contribution while receiving a current tax deduction at a time when it may offer a greater tax benefit. When set up properly, a Charitable Remainder Trust allows a taxpayer to contribute property to the trust and name a non-charitable income beneficiary to receive annual income from the trust for life or a specified period of time. At the end of the designated time period, the remainder of the donation is paid to the charitable beneficiary. Essentially, a Charitable Remainder Trust allows a high income taxpayer or their beneficiaries to receive income from a charitable donation while, at the same time, providing the taxpayer with the opportunity to take a large charitable contribution deduction at a time when they can best monetize the deduction.

While simply used charitable contributions may be beneficial to most taxpayers, more sophisticated giving strategies are available to provide estate and income tax planning benefits to those who may benefit from them. If you are interested in investigating the tax advantages of various charitable giving strategies, the knowledgeable and experienced professionals at CGT Solutions can provide you with the information you are looking for. To receive a free, no obligation consultation, contact us today!

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