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Charitable Financial Planning: When, Where and How to Give

| December 01, 2017
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As the year comes to an end, it is common for many of us to count our blessings and give to those who are less fortunate. The Pinnacle team believes donating to charitable organizations is important, and that it is an easy way to make a positive difference in the community.

We have outlined a few advantages of donating to charitable organizations, the limitations, and how to integrate giving into your long-term financial plan.

Maximizing Tax Deductions

To encourage more donations, the IRS created tax incentives for charitable giving, allowing you to subtract every dollar you donate from your taxable income, up to a certain point. For example, if you donate $1,000, you can deduct $1,000 from your taxable income.

To maximize the tax deduction, we often recommend that our clients donate appreciated long term securities to charities. This creates a win-win because the client avoids having to sell the stock and pay taxes, and also gets to deduct the higher fair market value of the stock from their taxable income. Further, the organization can sell the stock whenever desired but is exempt from paying taxes on it.

Understanding Public and Private Organizations

The IRS’s limitations on deductions vary depending on whether the organizations you choose to donate to are public or private charities. If you donate cash to a public charity, you can deduct up to 50% of your adjusted gross income (AGI). If you donate stock or an appreciable asset to a private charity, the limit on deductibility is 30% of AGI. Private foundations and fraternal orders are limited to 30% of AGI for cash and 20% of AGI for appreciated securities.

If you are unsure if the charity of your choice is public or private, you can look the organization up on the IRS website.

Claiming Your Deduction

Do you want to donate to a charity this year and receive the tax credit, but aren’t sure which organization to choose? In this case, Donor Advised Funds (DAFs) are a great option. DAFs are earmarked especially for charitable donations, allowing you to choose a charity to donate to in the future, but that provide tax savings upfront once the transfer is made. Our team has extensive experience setting up and executing DAFs.

In order to claim your tax deduction, we suggest you work with a CPA or financial planner to itemize your deductions. You or your CPA will then input the fair value of the cash, securities or whatever you donated on Schedule A. Feel free to reach out to Pinnacle Financial Advisors if you have questions about just how much you can deduct.

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