If you are considering donating to a public charity, you are not limited to donating cash. Depending upon your financial situation, giving objectives, and the needs of the charitable organization, certain accounts or pieces of property may be better suited for donation to the charity.
Writing a check to your favorite charity is the fastest and easiest way to make a financial impact. In some instances, you may be writing a check as part of your weekly donation to a church, in which case you can count the entire amount as a donation to the church. On the other hand, you may choose to attend a dinner sponsored by a charity, and in that case, only a portion of the purchase price will be eligible for the income tax deduction. In these circumstances, the amount that you have paid to attend the dinner needs to be reduced by the amount of benefit you have received (i.e., the cost of the dinner). The remaining amount will be deemed to be the charitable contribution. Most of the tax-exempt organizations that host these types of events print the cost of attendance and the amount that is considered a charitable donation on the ticket or advertising. Whether it is the entire donation, or a portion of it, the amount can be deducted from your income tax for the year the gift was made. For most cash donations to a charity, the total amount that can be deducted is limited to 60% of your adjusted gross income.
One major benefit of donating appreciated property (such as publicly traded stocks or real estate) to a charity is avoiding the capital gains tax that would otherwise be due upon its sale. If you were to sell the stock or real estate and give the cash to a charity, you would first be required to pay capital gains tax on any increase in its value from the time you purchased it to the date it was sold. However, if you donate the property to the charity and the charity makes the sale, it will not be required to pay tax on the capital gain. Additionally, giving the stock or real estate to the charity means that it will receive more value since there will be no reduction in the donation due to the capital gain tax. Lastly, when making a gift of appreciated stock or real estate that you have owned for more than one year, you are able to receive an income tax deduction in the year it was donated equal to its fair market value. If you are donating appreciated property that you have owned for less than a year, the value of your donation is limited to the fair market value of the property at the time of donation minus the amount of growth (appreciation), otherwise known as the cost basis. Be aware that the limit for donating appreciated property to charities is 30% of your adjusted gross income.
While this option is a great way to reduce your taxes, it is important to do your research to make sure that the chosen charity accepts these types of donations. Some small organizations may not have an efficient way of investing, managing, or selling appreciated property and would prefer a cash donation.
If you are currently 72 years old or older and want to donate money to a charity, you may have the ability to make a qualified charitable distribution from your account to the charity and avoid paying income tax on the distribution. If you take the required minimum distribution (RMD) and then donate the money to a charity, you will be required to pay income tax on the RMD. A qualified charitable distribution makes sense especially if you do not need the RMD, as it will satisfy the requirement that you take the annual distribution (if you are required to take it), allow you to support the charity, and enable you to avoid paying income tax on that distribution. However, it is important to note that a qualified charitable distribution does not qualify for an income tax deduction because the distribution is not included on your tax return as income to be taxed.
Another way you can donate your retirement account is to name the charity as a beneficiary in the account so that after you die, the retirement account transfers automatically to the charity. Regardless of who receives distributions, whether it is you (the owner) or a person you designate as a beneficiary, each distribution is subject to income tax. By donating the retirement account to a charity, it can use the money without incurring income tax liability. Although the retirement account will still be factored into computing any estate tax that could be owed upon your death, your estate will receive a tax deduction that can help offset the estate tax owed. Additionally, since the charity will not have to pay income tax on the distributions from the inherited retirement account, it will receive a larger benefit from the account than an individual would.
Giving to your favorite charity is not only beneficial for society but also has some potential tax benefits for you as the donor. MM&C Estate Planning Attorneys advise clients on strategies to reduce the value of an estate for tax purposes. Maryland estate tax applies to estates valued over $5 million. The Maryland estate tax rate starts at 0.8% and tops out at 16%. For 2022, the District of Columbia estate tax applies to estates valued over $4,254,800 (this number will likely increase annually for cost-of-living adjustments). The District of Columbia estate tax rate ranges from 11.8% to a maximum of 16%.
How MM&C Estate Planning Attorneys Can Help
At MM&C, we meet with clients for a consultation to determine your goals for creating an estate plan, and analyze your current tax bracket and tolerance for incurring income tax obligations on behalf of estate beneficiaries. We make sure that you understand the income tax implications of the estate plan and draft documents accordingly. We closely follow the federal and state laws that affect the estate plan, as they change frequently, and advise our clients accordingly.
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David Lucas is an attorney in the Estates & Trusts and Business & Tax practice groups at Miller, Miller & Canby, licensed to practice in Maryland and the District of Columbia. He focuses his practice in Estate Planning and Trust and Estate Administration. He provides extensive estate and legacy planning, asset protection planning, and retirement planning.
Contact David at 301.762.5212 or via email. To learn more about Miller, Miller & Canby’s Estates & Trusts practice click here.
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