Lower Your Taxes By Charitable Giving

My mother always told me that “doing something nice” would make me feel good. I’ve since discovered that when “something nice” is a gift to charity, she was more right than she knew. Before this year ends, remember that making a charitable gift can not only make you feel good, but benefit you as well.

Consider Gifting “Appreciated” Assets. Most people realize that gifts to a qualified charity can be deducted from their taxable income. This benefits the charity and benefits you by lowering the amount of income tax you must pay. The benefit to you can be even greater if you give “appreciated” assets rather than the cash you need to live. At my house, all assets are appreciated, but for IRS tax purposes an “appreciated” asset is one that is worth more today than when you got it. The problem with such assets is that if you sell them, the IRS wants between 5-35% of the profit (the “capital gain”). As a consequence, appreciated assets (eg. the GM stock you bought in 1975) are often of little day to day benefit. You can’t eat them, spend them, or use them to go on vacation, because you don’t want to pay the taxes that would result if you sold them.

If you give an appreciated asset to charity, you can deduct the full current value of the asset; not just the amount you originally paid for the asset. When the charity sells the asset, however, there is no tax on the profit. Charities are exempt from such taxes. As a result, 5-35% of the gift you make is money that would have gone to the IRS if you had sold the appreciated asset to get cash to make the gift. In essence, you are giving the government’s money to charity.

Charitable Trusts Make Your Gifts Even Better. The results get even better if you create a Charitable Trust to receive your gift. When you make a gift by way of Charitable Trust you can receive lifetime income payments from the assets you give. You also get a present tax deduction and avoid being taxed on the profit from the sale of the asset you give. Thus, you transform a non-income producing “appreciated” asset into a stream of income for your benefit. When you die, the assets in your Charitable Trust pass to the charity you choose. However, a Charitable Trust based plan can be set up to insure that your loved ones will receive an inheritance equal to what they would have received if you had not made the gift to charity. Your charity benefits; your loved ones benefit; and you benefit. Wouldn’t mother be proud?