Understanding charitable gifting

Donation of long-term appreciated publicly traded securities

A contribution of long-term appreciated assets such as stock may help reduce the impact of taxes and possibly result in a larger gift for the charity. If an individual donates appreciated securities, the donor will not have to sell the securities and will not realize any capital gains (or pay any capital gains taxes). If the securities have been held for more than one year, the donor will generally be able to claim a federal income tax deduction equal to the fair market value of the securities at the time of the gift.

An annual tax deduction for a contribution of securities to a public charity may be limited to no more than 30% of adjusted gross income (AGI). If the donation exceeds the maximum deductible amount in the year of the gift, the donor can carry over and generally deduct the excess amount during the following 5 years.

Donation of non-publicly traded assets

For many, charitable contributions of non–publicly traded assets—such as private C- and S-corporation stock, restricted stock, limited partnership or LLC interests, and other privately held assets—may be an effective and tax-efficient method of giving. These types of assets often have a relatively low cost basis (i.e., original cost) for the donor, and significant current fair market value that would result in large capital gains taxes if sold. When such highly appreciated assets are donated to a qualified charity in the correct and optimal manner, the donor not only minimizes any potential capital gains exposure but is also generally entitled to claim a tax deduction of the full current fair market value.1

Contributing complex assets to charity, however, can be complicated and is fraught with technical requirements and potential pitfalls. Fortunately, there are organizations that can help guide donors and their advisors through this process, as well as offer valuable planning and technical assistance. Donating non–publicly traded assets to a public charity that sponsors a national donor-advised fund program may make the process easy and more financially advantageous for the donor and the charity.

Qualified charitable deductions

Congress has permanently extended the ability of individuals who are age 70½ or older to take qualified charitable distributions (QCDs) from traditional, rollover, or Roth IRAs for payment directly to a qualifying charitable organization without counting the distribution as taxable income.2 This strategy may make sense for individuals who have to take required minimum distributions (RMDs) after age 73 but don't need the money to fund living expenses. Instead, an individual can direct the RMD to a qualified charity. The withdrawal, up to a $100,000 annual limit, will be free of federal taxes. Please note that QCDs must be made directly to a qualifying charitable organization, which does not include private foundations, donor-advised funds, or supporting organizations.

Split-interest strategies

Some advanced planning strategies can help you integrate charitable gifts with other financial goals. They include:

Charitable remainder trusts (CRTs) : CRTs are designed to provide income to beneficiaries (which can include the donor) for a fixed term of years or for the life of one or more individuals; the remaining assets at the end of the trust's term are distributed to one or more charities. The donor may claim a charitable deduction based on the present value of the remainder interest that will go to the chosen charities at the end of the term. In addition, the value of the remainder interest going to charity is excluded from the donor’s estate for estate tax purposes. Please note that there are gift and estate tax considerations if someone other than the donor receives the income stream.

Charitable lead trusts (CLTs): CLTs operate like CRTs but in reverse. They are designed to provide income generated by the assets in the trust to a chosen charity or charities for a fixed time or for the life of one or more individuals. At the end of the specified lifetime or term, the trust terminates and the assets are paid to either the donor or other noncharitable beneficiary. Depending on the type of charitable lead trust created, the donor may be able to take a charitable income tax deduction. An additional benefit is that the amount placed in the trust is usually removed from the donor’s taxable estate, provided the remainder does not revert back to the donor.3

Charitable gift annuities: A charitable gift annuity is a contract with a chosen charity wherein cash, securities, or other assets can be given to the charity and, in exchange, the charity agrees to pay a fixed annual payment to the donor or other individuals. The annuity payments are backed by the charity's entire assets, not just by the assets contributed. This strategy typically allows a tax deduction equal to the gift, reduced by the value of the annuity’s lifetime payments. (In some cases, a portion of those payments may not be subject to income tax if they are considered a return in principal.) A benefit is that the donor may postpone or even eliminate capital gains tax on the potential appreciation of the gift, and lock in lifetime income while knowing that the balance of the annuity will benefit an organization they  care about.

Donor-advised funds (DAFs)

These programs allow donors to make irrevocable contributions to a qualified charity. The benefits of a DAF are numerous. First, donors are able to make a charitable contribution and may be eligible for an immediate tax deduction. Although the charity has ultimate control, the donor is able to recommend how the assets in the DAF are distributed to IRS-qualified public charities over time. Donors are permitted to make further contributions at any time, but having the balance in place in their DAF allows a certain level of giving regardless of changing financial circumstances—a critical point during challenging economic times.

Second, individuals who create a DAF are typically also able to recommend how those funds are invested. Many DAFs offer a variety of investment pools that allow donors to recommend the investment style that fits best with their time horizon—growth, fixed income, money market, or blended investments. DAFs are more flexible and cost effective than many other charitable giving options. They help donors achieve strategic, thoughtful giving for themselves and, in many cases, for their entire family.

Private foundations

A private foundation is a tax-exempt organization that must be organized and operated exclusively for charitable purposes. It is established by an individual or a family, typically through a substantial initial gift. The charitable activities of a private foundation generally involve receiving charitable contributions, managing the foundation's charitable assets, and making grants to other charitable organizations to support their charitable activities. The private foundation makes grants to public charities or other private foundations as determined by the board of directors or trustees, who are often family members, friends, or advisors. Under current law, contributions to private foundations generally provide a potential immediate tax deduction—up to 30% of adjusted gross income for cash gifts and 20% for long-term appreciated publicly traded assets. In general, the private foundation must distribute at least 5% of assets each year to qualifying charities.

Charitable giving can be accomplished in a variety of ways. Consult your attorney or tax advisor for help determining the strategy that fits best for you and your family.

1. As determined by a qualified appraiser and in compliance with IRS rules and regulations. 2. Protecting Americans from Tax Hikes (PATH) Act of 2015. 3. In order for the trust assets to be removed from the donor's taxable estate, gift tax has to be paid on the value of the remainder interest passing to the non-charitable beneficiaries at the time of the creation of the trust.

The change in the RMDs age requirement from 72 to 73 applies only to individuals who turn 72 on or after January 1, 2023. After you reach age 73, the IRS generally requires you to withdraw an RMD annually from your tax-advantaged retirement accounts (excluding Roth IRAs, and Roth accounts in employer retirement plan accounts starting in 2024). Please speak with your tax advisor regarding the impact of this change on future RMDs.

Recently enacted legislation made a number of changes to the rules regarding defined contribution, defined benefit, and/or individual retirement plans and 529 plans. Information herein may refer to or be based on certain rules in effect prior to this legislation and current rules may differ. As always, before making any decisions about your retirement planning or withdrawals, you should consult with your personal tax advisor.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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