When you want to support a charity, writing a check may seem like the simplest option. But before you decide, it’s helpful to consider some of the best ways to give to charity. Cash is not always the most effective asset to give. Depending on your circumstances, donating appreciated stock or using a retirement account may allow you to support a cause you care about while also creating potential tax benefits. The best choice depends on your finances, the assets you own, your charitable goals, and what the organization can accept.
Here are three common ways to make a charitable gift and some factors to consider before choosing one.
Giving Cash to Charity
Cash is usually the easiest way to make a charitable donation. You can write a check, make an online contribution, or arrange a recurring gift to an organization you support.
However, the amount you pay is not always the same as the amount that may qualify as a charitable contribution.
For example, if you purchase a ticket to a charitable dinner or fundraising event, you may receive something of value in return. Generally, only the portion of your payment that exceeds the fair market value of what you received may qualify as a charitable contribution.
Whether a cash gift provides an income tax benefit also depends on current tax rules, the organization receiving the gift, and your individual tax situation. Charitable deduction limits and other requirements can change, so it is important to coordinate larger gifts with your tax advisor.
Donating Appreciated Stock or Other Property
If you own stock, real estate, or another investment that has increased substantially in value, donating the asset itself may be more advantageous than selling it and donating the proceeds.
Consider appreciated stock. If you sell the stock first, you may owe capital gains tax on the increase in value. If you instead transfer the stock directly to a qualified charity, you may be able to avoid recognizing that capital gain.
That can create several potential advantages:
- You may avoid capital gains tax. By donating the asset rather than selling it yourself, you may avoid recognizing the gain that would otherwise result from the sale.
- The charity may receive more. A tax-exempt charity can generally sell donated stock without paying the same capital gains tax an individual would pay.
- You may qualify for a charitable deduction. For certain appreciated assets held for more than one year, you may be able to deduct the asset’s fair market value, subject to applicable tax rules and limitations.
Different rules can apply depending on the type of property, how long you owned it, the type of charity receiving it, and how the charity will use the property.
Before transferring stock, real estate, or another noncash asset, contact the charity. Smaller organizations may not have an easy way to receive or sell certain assets and may prefer a cash gift.
Using an IRA for Charitable Giving
Retirement assets can also play an important role in charitable planning, both during your lifetime and as part of your estate plan.
Making a Qualified Charitable Distribution During Your Lifetime
If you are age 70½ or older, you may be able to make a qualified charitable distribution, commonly called a QCD, directly from an IRA to an eligible charity.
A properly completed QCD can be excluded from your taxable income. If you are also required to take required minimum distributions, or RMDs, the QCD may count toward satisfying some or all of that requirement.
This can be particularly useful if you do not need the money you would otherwise withdraw from the IRA and would prefer to use it to support a charitable organization.
Because a qualifying QCD is excluded from taxable income, you generally cannot also claim the same amount as an itemized charitable deduction.
Naming a Charity as a Retirement Account Beneficiary
You can also name a charity as a beneficiary of an IRA or other retirement account.
This can be an efficient estate-planning strategy because distributions from many inherited retirement accounts are taxable income when received by an individual beneficiary. A qualifying tax-exempt charity generally does not pay income tax on those distributions.
As a result, some families choose to leave retirement assets to charity while leaving other assets to children or other loved ones.
That does not mean retirement accounts should always go to charity. Beneficiary designations should be coordinated with your overall estate plan, tax circumstances, family needs, and charitable goals.
Charitable Giving as Part of Your Estate Plan
Charitable giving does not have to be considered separately from estate planning.
Lifetime gifts can reduce the property you own at death. Gifts made to qualifying charities at death may also qualify for the federal estate tax charitable deduction when estate tax is relevant.
More importantly, thoughtful charitable planning can help you decide which assets should go to charity and which may be better suited for family members or other beneficiaries.
Which Charitable Gift Is Right for You?
There is no single best way to give to charity.
Cash may be the simplest choice. Appreciated investments may offer additional tax advantages. Retirement accounts may be particularly useful for individuals who want to incorporate charitable giving into their retirement or estate planning.
The right strategy depends on what you own, what you want to accomplish, and how the gift fits into your broader financial and estate plan.
At Premier Legacy Law, we can help you evaluate how charitable giving fits into your estate plan and coordinate with your financial and tax professionals when appropriate. If leaving a charitable legacy is important to you, contact us to discuss how your estate plan can reflect those goals.
