The holidays are both the season for giving and a time of year when your tax liabilities come into sharp focus. As you calculate your earnings and estimated taxes, December is a perfect time to consider philanthropy that can both benefit the community causes you support during the Christmas season, and also work in your favor when the April 15 tax day rolls around in 2013.
With looming uncertainty in the tax code in future years, especially regarding tax deductions and capital gains tax rates, giving in 2012 when tax deductions are intact and tax rates are known, also can have its advantages.
There are many ways to contribute to charities and non-profits. Each method has its own specific advantages and drawbacks. Your level of giving, your tax situation, and your desired time commitment will determine what form of charitable giving you choose this holiday season. Here is a quick look at six ways you can give this holiday season and what it might mean for your tax bill in 2013:
* Cash contributions to qualified charities
This is the simplest form of charitable giving. Simply write a check to the qualified charity of your choice and take the tax deduction for the charitable gift that comes along with your philanthropy. This makes sense for individuals who are giving modest gifts and do not want to deal with the hassle of lengthy paperwork or the complexity of setting up trusts or foundations. The tax benefits can still be significant.
* Donation of appreciated property
While donating property is more complex than giving cash, there are circumstances when property donation can be much more beneficial to both the charity and the donor than a straight cash donation.
Property that has significantly appreciated will count for a tax deduction at the property's appreciated value with a proper third-party appraisal. This provides a significant tax deduction for the donor, without requiring the payment of capital gains tax on the property's appreciation. The charity benefits from a full, pre-capital-gains-tax donation and the donor gets a significant tax deduction that can offset other tax liabilities.
Property can be a number of things: real estate, a vehicle or art work. Many charities also accept securities under similar circumstances. Check with your desired charity to see what property they accept as a donation and be prepared to work through a third-party appraisal to value any property donations.
* Create and contribute to a private
foundation
Setting up and running a private foundation costs money and takes time, but it gives large donors a level of control and over donations that is unique. Large charitable donations to a private foundation can be counted in the current tax year, but can be controlled by the foundation for years to come. With the uncertainty over future tax rates and deductions, large donors should consider the tax benefits of making large private foundation contributions this year, even if the foundation's donations will be metered out to qualified charitable organizations over several years.
Private foundations are not a fit for all philanthropists. But large donors who have time to commit to their philanthropy, want control over their donations, and want the prestige of their own private foundation will find this an attractive option.
* Contribute to a community foundation
Contributing to a community foundation has many of the benefits of forming a private foundation, but comes with a lot less time commitment. Community foundations such as the Community Foundation of Western Nevada are experts in philanthropy and will walk donors through setting up a fund under the community foundation umbrella that can be controlled by the donor for years to come.
Similar to a private foundation donation, the tax benefits of a community foundation gift registers in the year the gift is given, while the funds can be dispersed to charities over several years.
Most community foundations also handle donations of securities and property, as well as cash. If you are interested in donating to a local community foundation, contact the Community Foundation of Western Nevada, where the expert staff can walk you through the benefits of various forms of donating.
* Set up a charitable remainder trust
A charitable remainder trust is a way to lock in the tax benefits of a charitable donation while still receiving income from assets or investments that will eventually be donated.
Typically, a charitable remainder trust takes appreciated property and puts it into a trust. A set amount of income from the trust is paid to the trust owner each year. After the term of the trust expires, the trust's balance is donated to charitable organizations.
Charitable remainder trusts allow a taxpayer to deduct the amount of the eventual charitable donation in the year the trust is formed. These trusts are irrevocable and the income from the trusts can fluctuate with the value of the assets in the trust. But the tax benefits of creating a trust can be significant for donors looking at significant capital gains or estate tax liabilities.
* Set up a charitable lead trust
A charitable lead trust is a complex donation tool that is appropriate for very wealthy donors who are willing to do a lot of planning for charitable donations.
Charitable lead trusts give annual payments to a charity for a set period of years. These donations are tax deductible. Once the term of the trust expires, the remainder of the trust is given back to the trust's founder, or his or her heirs.
Charitable lead trusts are typically used to reduce exposure to estate taxes, but are also irrevocable and complex. The benefit of a lead trust is that the assets continue to appreciate during the term of the trust, but that appreciation is protected from transfer and estate taxes under the charitable trust.
All of the above are ways individuals can certainly make a difference in their charitable giving and in their tax situations. It is always advisable to seek professional advisors who are well versed in these planning techniques.
Happy Holidays !
John Solari is a certified public accountant and a partner in J.A. Solari & Partners LLC of Reno. Contact him at 775-827-3550 or through www.jasolariandpartners.com.
