Donating to charity is a great way to support a cause that matters to you. Your contribution can make real change, providing resources and opportunities to those in need. However, this act of kindness goes beyond simply giving back.
With proper planning and guidance, charitable contributions can enhance your financial plan, providing tax cuts while generating income.
It probably sounds too good to be true. How can you possibly save money and make money at the same time? The answer is through a charitable remainder trust (CRT).
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
How a charitable remainder trust works
A CRT is an estate and financial planning tool primarily designed to reduce your taxable income. This tax-exempt irrevocable trust fund allows you, the trustor, to make contributions that are eligible for a partial tax deduction. These contributions can be cash, property, private business interests and stocks.
Once these contributions are made, the trust will then pay one or more noncharitable beneficiaries for a specified time that cannot exceed 20 years, or the life of noncharitable beneficiaries. You can structure the trust to disperse payments annually, semiannually, quarterly or monthly. Once that time expires, or the trustor dies, the remaining funds will go to the designated charity(s).
When it comes to taxes, eligible donations are tax-deductible so long as the recipient is a 501(c)(3) charitable organization, according to the IRS. The type of deduction you receive depends on the trust’s type, term, projected income payments being paid to the charity and the interest rates set forth by the IRS. There are also different deductions available for different assets being donated, and each has its limitations.
For example, cash deductions generally cannot exceed 60% of your adjusted gross income (AGI). So, if your AGI is $70,000, you can deduct up to $42,000 in cash donations. If your deductions exceed this amount, you can typically carry over the extra amount — deducting it in future tax years.
Noncash items carry their own deductions. If you’re donating appreciated assets such as real estate, stocks, artwork or other valuable goods, you can deduct the fair market value from your taxable income. Donating appreciated assets allows you to avoid capital gains tax, cutting down the tax bill you would get if you were to sell the items.
Another donation option available to you is an IRA charitable rollover. This method, also known as qualified charitable contributions (QCDs), allows you to transfer funds directly from your IRA to the qualified charity of your choosing, thus excluding it from your taxable income. However, since it is a retirement account, you must meet a few requirements to get the tax benefit. The funds must go directly from the IRA to the charity. You cannot withdraw the money first and then donate it. You must also be at least 70½ to donate. There are limitations to how much you can transfer. According to the IRS, qualified owners can transfer up to $100,000 to charity, tax-free, each year.
How to claim these deductions
With the exception of IRAs, the key to claiming these deductions is to itemize them when you file your taxes. You’ll also need to prove that you actually made these donations in order to claim them once you file, so be sure to keep your receipts. Donations of more than $250 require a receipt.
In addition to various tax benefits, CRTs can provide some benefits to the estate planning process. Since these trusts cannot be modified or terminated without permission from the charitable beneficiary, the trustor is effectively giving up ownership rights of the assets transferred to the trust and the trust itself. This means the trust will not be included in the probate process once the trustor dies. The CRT is also exempt from estate taxes and can be transferred to the listed beneficiary immediately.
Making charitable contributions creates a win-win scenario for both you and the charity of your choice. Charitable donations allow you to support causes that are important to you while simultaneously creating an income stream and tax cuts. Note that the tax benefits, income stream and estate planning ease a CRT can provide you are dependent on your situation.
If you’re thinking about incorporating this giving strategy into your portfolio, do some research. Identify a cause that is important to you, then consider meeting with a financial adviser. They can help you establish a CRT that works for you, maximizing your tax deductions and income stream.
Related Content
- Six Charitable Giving Strategies: Feel Good and Cut Your Taxes
- DAFs vs. Private Foundations: Which Giving Strategy Is Right for You?
- How to Maximize Your Impact With Strategic Philanthropy Tools
- Retirees: Make Your Money Last With Stable Income Strategies
- How You Can Tackle Health Care Costs in Retirement
-
Stock Market Today: Dow Dives 1,679 Points on Trump Tariff ShockU.S. stocks lost roughly $3.1 trillion in market cap on Thursday – the biggest one-day decline since the start of the COVID-19 pandemic in March 2020.
-
Did Florida’s Chance at $1,000 in Property Tax Rebates Vanish?State Taxes The Florida Legislature bypassed Gov. Ron DeSantis’ wish to cut property taxes and instead voted to lower the state’s sales tax.
-
How Building Liquidity Into Your Retirement Plan Can Pay OffTo succeed in investing for retirement, you need time and discipline — liquidity can give you both.
-
Striking Oil in Opportunity Zones: Now Might Be the Best Time to InvestYou could unlock hidden wealth in QOZs with strategic oil and gas investments, potentially combining tax advantages with long-term growth in an essential industry.
-
What You Don't Know About Annuities Can Hurt YouLack of awareness leads many to overlook these potent financial tools, and with the possibility of running out of money in retirement, that could really hurt.
-
Three Keys to Logical Investing When Markets Are VolatileFocusing on these market fundamentals can help investors stay grounded rather than being swayed by emotion or market hysteria.
-
Yes, the Markets Are Spooked, But You Don't Have to BeIt's human nature for investors to freak out in a downturn. But with a little discipline, you can overcome the urge to sell and stay focused on long-term goals.
-
Remembering Bogle: A New Standard for Municipal InvestingImprovements in technology, data, systematic trading and risk analytics have led to more successful municipal indexing.
-
Winning Strategies for Financial Advisers as Clients' Lives EvolveHow can the wealth management industry help make life transitions easier for the adviser and the client?
-
How Advisers Can Establish Relationships With HNW ProspectsThese strategies can help to build influence with high-net-worth individuals, who are often looking to an adviser for insight rather than solutions.
