Most people would rather see their money go to their favorite charities than to the IRS, so why not plan your charitable giving to take advantage of the tax benefits? A well-planned donation to charity can provide you with all of the following benefits:
The following strategies can be combined to create the right giving plan for your circumstances:
Appreciated Property Gifts
If you donate a piece of appreciated property to charity, you can avoid capital gains tax and deduct the market value (FMV) from your income taxes. In addition, removing that asset from your estate reduces your potential estate tax burden.
Charitable Remainder Trusts (CRTs)
CRTs give you the tax benefits of giving to charity while postponing the actual transfer of property or funds. These trusts work particularly well with appreciating assets, such as stock in a family-owned business or real estate. No income tax is imposed on income remaining in the trust. You also get a current income tax deduction (based on the future value of the asset when it is transferred to the charity) and remove the remainder value of the asset from your estate, reducing your potential estate tax.
Charitable Lead Trusts (CLTs)
With a CLT, you donate the use of an asset and the income it generates for a period of years, and then the asset reverts back to you or whomever you choose. You receive a current income tax deduction for the value given to charity (but the trust pays income tax on its income). If a CLT is created upon your death, it can also reduce potential estate tax.
Instead of your 401(k) funds, consider leaving your heirs an asset like appreciated capital gain property that is not taxed, and give the balance in your retirement account to charity. The charity won't pay taxes on the income, and the value of the assets will be deducted from your estate.
Note: This is a general overview; if you are considering any of these charitable giving options, consult a qualified financial professional for more specific advice before making your decision.