How to make a difference while also helping your finances
As the end of the year approaches, now is a great time to look at your finances with charitable giving in mind. By making strategic donations, you can enjoy certain tax benefits while also making a difference for a cause that you believe in. Now that’s a win-win!
To get more insight into smart ways to give, we spoke with Joseph Passaretti, director of estate and gift planning at the San Diego Humane Society. Beyond simply writing a check, we discussed methods of giving ranging from real estate and stocks to charitable gift annuities. Read on to discover how you can help a cause you care about while also helping your wallet a little, too.
Real estate donations
When you make a large cash donation to a reputable charity, you can take a deduction from your taxable income. However, by making other kinds of donations, you can see an even larger tax benefit while also making an even bigger difference for your charity.
One of the kinds of donations that Joseph Passaretti frequently handles for the San Diego Humane Society is real estate. Passaretti says, “The process of donating real estate can provide numerous benefits, including generating income and a significant charitable deduction. Gifting real estate can be complex and will most likely involve laws and regulations, so donors should consult with their tax, legal, or financial adviser to ensure they are making the most effective decision.”
According to Passaretti, there are three main types of real estate donations that have tax benefits for the donor. First, “a direct gift of real estate by transferring the deed or title from the donor to the charity: The donor typically receives a tax deduction equal to the fair market value of the property and the deduction can be carried forward for five years. The donor also avoids paying the capital gains tax that they would be responsible for in a typical sale.”
Alternatively, if you own a property that has gone up in value, you can use that property to generate income while avoiding taxes. Passaretti says the second type of donation is “placing highly appreciated real estate into a charitable remainder trust in order to create a stream of income for the donor: The trust sells the property, and no taxes are levied because the trust is tax-exempt. The donor then receives an immediate charitable deduction, and receives ongoing annual payments for themselves or another designation beneficiary. At the end of the life of the trust, the remaining assets are distributed to designated charitable organizations.”
Finally, you can even donate a property that you currently occupy to charity, and keep living in it. Passaretti says that in this type of donation “the donor agrees to gift their residence to a charity, but they retain the right to live in the property. The donor receives an income deduction in the year the gift is made, based on their age and value of the property. It also removes a taxable asset from their estate. The donor agrees to pay real estate taxes, insurance, utilities, maintenance and repairs while living, and upon the donor’s death, the charity receives the property.”
Appreciated stock donations
If you own a stock that has gone up in value over the past year, an appreciated stock donation is another smart way to give. By donating your appreciated stock, you avoid paying capital gains tax on your stock earnings. Donating your stock directly to charity instead of cashing it out and donating cash also allows you to give 20% more to your favorite cause, thanks to cutting out capital gains tax.
Appreciated stock donations are a great way to make a bigger difference with your donation, and they can even help you avoid paying more taxes in future years. Many investors who plan to hold a certain stock for a long time occasionally donate shares to charity and buy the same shares again at the current price. By doing this, they reset the cost basis of their stock at a higher value to avoid paying more in capital gains taxes when they do eventually sell their shares.
Charitable gift annuities
Charitable gift annuities are another common way that people can give to charity while getting money back, too. This type of donation falls under the category of planned giving. With a charitable gift annuity, the donor agrees to transfer property or a large amount of money to a charitable organization. The charity then provides a lifetime passive income stream for the donor and they get to take a personal income tax deduction in the year of the gift.
Passaretti says that charitable gift annuities tend to be best for a particular type of donor. “Charitable gift annuities benefit individuals/couples who are seeking to support a charity, and to receive a fixed income stream for life, while receiving a significant charitable tax deduction. Types of individuals that benefit most would include donors in a high tax bracket or an individual who has appreciated assets, such as stock in a taxable account, and could use a sizable tax deduction. These type of annuities also benefit the individual/couple who rely on a fixed monthly budget — particularly because these annuities pay a guaranteed amount for the donor’s lifetime, regardless of the stock market’s performance.”
Giving for beginners
If you don’t have a favorite charity or are unsure of how to start giving, Passaretti shared some key tips to help you get started:
- Identify and prepare a list of the causes/charities that are most important to you.
- Establish an annual budget for your charitable giving.
- Research your preferred list of charities to make sure they are registered as 501(c)(3) organizations with the IRS. You can go to the IRS website and do a tax-exempt organizational search to confirm their status.
- Charity Navigator is one example of an excellent unbiased source that evaluates the financial health and accountability of charities.
- Visit your charities of interest and request a tour of the facilities to view the programs and have the opportunity to meet the staff, volunteers, and clients.
- Make sure to keep records of all your annual charitable donations for your tax reporting. This should include receipts/letters from charitable organizations.
Giving on a budget
If, like many Americans, you don’t have extra properties or stock shares laying around, there are still impactful ways that you can give. You don’t have to be wealthy to make a difference and take advantage of the tax benefits of giving.
Passaretti says, “We are fortunate that San Diego Humane Society receives financial support from many people in our community that are on tight budgets. I think you first have to design an annual charitable giving budget. You can set up a financial account and contribute monthly or per pay period to reach your annual goal.”
Passaretti continued, “Additionally, many employers may have programs that match employee gifts to charities. Check with your human resources department to inquire if they match employee charitable giving up to a certain amount. If so, you may be able to double the amount of your gift.”
Even retirees on tight budgets can take advantage of the tax perks of giving. Passaretti says, “Another option, if you are 70 ½ years of age or older, is to give through your mandatory withdrawal from your IRA (the Required Minimum Distribution). If you alert your IRA holder to transfer a part of that distribution to a charity or charities, and it bypasses you, it will not count as taxable income for you.”
So, as you wrap up your year, why not consider making a donation to an organization that’s working to make the world a better place? You can feel good about supporting an important cause, and your wallet just might thank you.
A deeper dive — Related reading on the 101:
Read the heartwarming story of a family that gave back to someone in need.
Donating clothing is another great option when it comes to giving to charities. Learn more about the process here!