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Published November
2005
Charitable
giving
pays off for everyone
You’ve
probably heard that “generosity is its own reward.” This may be true,
but when you make a charitable gift to a nonprofit organization, your
generosity also could reward you — especially when you file your taxes.
In fact, you can
get at least three types of tax benefits:
- Immediate
tax deduction — You can deduct your charitable gift from your current
income taxes. So, for example, if you give $1,000 in cash to a charitable
group this year, and you are in the 28 percent tax bracket, you could
deduct $280 from your taxes on your 2005 tax return.
- Avoidance
of capital-gains taxes — Instead of writing a check for $1,000 to
a charitable group, you might want to donate appreciated assets, such
as stocks. Suppose that you have been holding shares of a specific stock
for several years. Let’s assume that you bought these shares for $250,
and that they are now worth $1,000. If you were to give these shares
to a recognized charitable group, you would get the $280 tax deduction
based on the shares’ current market value. Furthermore, because you
are not selling the shares, you will avoid having to pay any capital-gains
taxes on your $750 profit.
- Potential
reduction in estate taxes — By removing an appreciated stock from
your estate, you may be providing a tax break to your heirs, if your
estate is large enough to generate estate taxes. Under current law,
today’s $1.5 million federal applicable exclusion amount will increase
over the next several years; the federal estate tax will be repealed
in 2010 and will return in 2011 with a $1 million exclusion, unless
Congress passes new legislation.
Charitable-giving
methods
Depending on your circumstances, you might find it advantageous to establish
a charitable-giving vehicle, such as one of the following:
- Charitable
remainder trust — If you own large amounts of shares of an appreciated
stock, you may want to donate some or all of them to a charitable remainder
trust. The trust can then sell the stock, reinvest the proceeds and
pay you a lifetime income stream. You’ll defer capital-gains taxes on
the sale of your stocks, and you can use the income to help diversify
your portfolio or pay for some living expenses. When you die, the remaining
proceeds of the trust go to the charitable group that you have chosen
in your trust.
- Private foundation
— If you have a very large estate, you may want to create a private
foundation to distribute assets to charities. After you’ve established
a private foundation, it will typically distribute 5 percent of the
fair market value of its assets each year to the charities you’ve chosen.
Unlike a charitable remainder trust, contributions to private foundations
do not allow for donors to receive an income stream.
Before establishing
any of these charitable-giving arrangements, consult with your tax and
legal advisers. But no matter how you choose to make your charitable gifts,
don’t hesitate to be as philanthropic as you can afford. By helping out
those organizations that do valuable work, you’ll unquestionably be making
a good investment.
Eric Cumley is a Certified
Financial Planner and investment representative with Edward Jones in south
Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member
investment firm with more than 9,000 offices nationwide.
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