Thanksgiving is upon us. But ’tis not yet the season of Black Friday, Cyber Monday and a month-long, crazy mess at every store in town: ’Tis instead the season of actually feeling thankful for all the important, nonmaterial stuff we usually take for granted, and of thinking about those who aren’t so lucky. That’s why the weeks following Thanksgiving are reportedly by far the most popular time to donate.
If you’re also in the mood to spread the wealth, that’s great! But make sure you do it right — there are many ways to give away money (and some great tax benefits for doing so). So alongside Harlan Levy, CPA, we’re going to donate some knowledge.
What Are Some of the Ways to Give Money Away?
A lot of this depends on your net worth, and perhaps, your age. First, you can just write a check to a 501(c)(3) (aka, federal tax-exempt) organization: These include the gazillions of nonprofits like the Red Cross, the American Heart Association, Make-A-Wish Foundation, Susan G. Komen, museums, many arts organizations, some zoos, the United Way, your local PBS station, your local food bank, many religious organizations — all the kinds of places we think of when we think of philanthropy. Along these lines, there’s also in-kind donations, like when you donate clothes or furniture to Goodwill, The Salvation Army or Habitat for Humanity.
The second way is via what’s called self-directed charitable funds. That’s done through a financial-services company like, say, Fidelity. These are investment funds through which you can donate directly to charity. You can’t pull money out, but the upside is that these funds are not only non-taxable, but the gains earned from your investments are tax-deductible.
Older, wealthy people will sometimes opt for what are called charitable remainder trust donations. That’s where you donate a lot of money (say, $1 million) and it’s paid back to you at, say, 9 percent a year. When you pass away, the organization gets to keep the remainder. People will use the money they get back as an income stream, like it’s an annuity. It’s usually not done by anyone under 70, as the life expectancy would likely be too long and the amount of money the organization would keep at the end might be too low.
So If I Donate, How Much Can I Deduct on My Taxes Every Year?
Tax deductions work by allowing you to subtract certain items (like charitable giving, business expenses, whatever) from your income to give yourself a smaller taxable income. However! You can deduct only up to 50 percent of your income in charitable giving. So, let’s say you inherited a bunch of money, and you want to give away some of it. If you want to give away $100,000 one year, but your salary is $100,000 a year, sorry — you don’t end up with $0 for your taxable income number. You can only deduct $50,000. You have to carry forward the rest, and you can do so for five years. So be sure to donate in accordance with what you earn.
How Do the Really Rich Folk Do It Then?
Perhaps you’ve heard of the Bill & Melinda Gates Foundation? Or the Rockefeller Foundation? These industrialists put their Microsoft or Standard Oil stock (which are worth tons) into their foundations. Pro athlete foundations tend to do this, too. Donations to a foundation are tax deductible (up to 30 percent of your income, not the normal 50 percent, however). So they’ve got that going for them, but it gets better: Normally when stocks for stockholders increase in value, they’re subject to the capital gains tax (at whatever tax bracket you’re in — from 10 to 37 percent). But for your donations to a foundation, you don’t have to pay the capital gains tax! It’s a great way to save, oh, millions of dollars a year in taxes.
Usually investors keep the principal of their investments in the foundation and simply give away the stock’s earnings as philanthropy. They get to claim a charitable tax deduction on their donation to the foundation, and again, pay no capital gains tax. When you’re talking about big money, this means saving hundreds of thousands of dollars, sometimes millions, on taxes every year. Wouldn’t that be nice? All the foundations themselves have to do is make sure to give away enough money each year, or they get taxed on it.
Can I Just Make up a Foundation, like George Costanza?
Well, it’s a pretty complicated process. Every charitable organization has to fill out byzantine forms to be recognized as a charitable organization — you have to complete one for the IRS, and one in the state that you want to establish your own Human Fund in. Also, every charitable organization has to file tax returns each year. Otherwise, knock yourself out.
What If I Want to Donate Like, Artwork or a Piano or Something Instead of Cash?
That’s great, and tons of organizations will take them. The only rule you’ve got to be aware of is that if it’s worth more than $5,000, you need to get it appraised. An appraisal isn’t expensive, so don’t sweat that too much. But, sorry, if you cleaned out your garage and gave away tons of stuff that you think was worth more than 5Gs, you can’t claim more than $5,000 in tax deductions if you don’t have proof of an appraisal.
What About Estate Tax? Can I Just Give Money to My Kids While They’re Alive?
Sure, and not to worry — the estate tax really only applies if you and your spouse are worth $22 million or more. If you are, you’re allowed to give your child $15,000 a year. Though if you’re married, your spouse can also give your child $15,000, too. If your child is married, you can each give the spouse $15,000 a year too, totaling $60,000 a year to your child and their spouse.
In the real world, Levy says, clients who own jewelry stores, or say, lots of art, tend not to have any jewelry or art left over when they die — it usually quietly changes hands before then, if the family is savvy. Cash, of course, is traceable in bank accounts, but non-cash items? That’s a lot tougher to trace.
So… Think of the Children, but Also Think of Your Taxes?
Yep. As the saying goes, it’s better to give than receive. But if you’re due to receive some significant tax relief for all that giving, well, why not?