The Best Method to Gift to Charity

The end of the year is a good time to consider donating to your favorite nonprofit organization and to take advantage of tax benefits. Today's post is from Elaine Bedel, Women's Fund Advisory Board member and financial consultant. We are grateful to Elaine for sharing her expertise with our readers.

By Elaine E. Bedel, CFP®
President, Bedel Financial Consulting, Inc.

If your objective is to maximize the tax benefit of your gifts to charity, I recommend you start early. Some of the best options will take time to complete.

Depending on the form of your gift to charity, you can receive tax benefits beyond the charitable tax deduction itself. To take advantage of these other benefits, you need to review your personal situation and plan ahead to allow sufficient time to complete the gifting process.

Gifting Cash is Easy….But Not as Tax Wise
Writing a check to your favorite charity is probably the easiest form of gift-giving. The gift is completed as soon as the check is received by the charity, regardless of when the funds are deducted from your account. Generally, the date on the check is assumed to be the date of the gift.

Gifting Appreciated Assets Provides Greater Tax Benefits
If you gift an appreciated asset, you receive the same tax deduction as you would for gifting cash. In addition, you avoid future potential capital gain tax. You would receive a tax deduction on Schedule A and eliminate the capital gain tax that would be incurred at the sale of the asset.

An appreciated asset is any property that you purchased for less that it is currently worth. If you sell an appreciated asset, you would be required to pay a capital gain tax on the difference between the net sale amount and your cost to purchase. An appreciated asset may be real estate, a work of art, an investment security, or any other property that you own that can be gifted to a charity.

Charitable Gift Funds Allow You to Front-Load Your Tax Deduction
A charitable gift fund, officially referred to as a "donor advised fund", allows you to contribute cash, appreciated securities, real estate, cash value of life insurance, and, in some cases, other forms of business ownership to your own charitable giving account. You can then request gifts to be made to charities through your account until your original contribution, along with any investment earnings, is depleted. You can establish a donor advised fund through a public charity. Many of the mutual fund companies have established public charities to offer donor advised funds. You can also create a donor advised fund through a local community foundation, such as Central Indiana Community Foundation.

Charitable Giving from your IRA
Anyone who is 70 ½ years of age or older can make gifts to qualified charitable organizations from their Individual Retirement Accounts (IRA). The benefit to the taxpayer/donor is that any funds distributed from the IRA to a charity are excluded from the taxpayer's taxable income for the year. Therefore, no income tax is paid on the IRA distribution. Likewise, the taxpayer does not take the contribution as a charitable deduction on Schedule A of the federal income tax return.

Priority of Giving Methods for Tax Benefits
The following represents the priority for methods of giving based on the greatest tax benefit:

1. Distribution from IRA (for those who qualify).
2. Gift of appreciated assets directly to a charity or through a charitable gift fund.
3. Cash or check.

Summary
Advice: Start early and seek professional advice if necessary.

Making a charitable contribution can be as easy as writing a check or as complex as valuing and transferring appreciated property. You will need sufficient time to complete the gifting method that can provide the greatest tax benefit for you. Since certain gifting strategies may impact other areas of your overall financial plan, you may also want to secure the professional assistance of a financial planner to analyze the appropriate method of giving for you.

Elaine E. Bedel, CFP is president of Bedel Financial Consulting, Inc., a fee-only wealth management firm providing financial planning and investment management services. For more information, visit their website at www.BedelFinancial.com or email to ebedel@bedelfinancial.com.