Five tips to help make the most of your giving

As a financial planner, it’s common that people come to me for ideas on how to be more effective with their spending, savings and investments. What’s less commonly asked—and is a topic I like to discuss— is how to be more effective with charitable gifts. Giving to our favorite charitable causes and houses of worship is an important aspect of the American family’s finances. Why not, then, try to get the most bang for your buck?

Giving to Individuals
Each year, you can give $14,000 to other individuals without triggering any additional gift tax paperwork. This amount is referred to as the “annual gift tax exclusion.” The exclusion is $14,000 per individual recipient per year. So, if you have three children, you can give them each $14,000. If you’re married, you and your spouse combined can give $28,000 to individuals. In the three-child scenario, this would mean that a couple could give their three children a total of $84,000 during the year. If you’d like to give more, there’s a smart way you can do that as well: consider paying directly for the tuition or medical expenses of the individual to whom you plan to give.

Smart Tip #1: If you pay directly for qualified medical or tuition expenses, these gifts also fall into a gift-tax exclusion category, meaning they don’t count towards the annual $14,000 amount.

These rules apply to all individuals, not just relatives. Don’t forget, if you’re married, you can give your spouse as much money as you’d like!

Giving to Charitable Organizations
Many people still sit down at the end of each year and break out the checkbook to send money to various charities and churches. What’s often more useful to these organizations, and easier on your budget, is to break your gifts into monthly amounts paid throughout the year. This approach helps both you and the charity plan more effectively. Think about it this way. If your paycheck came at random intervals throughout the year and in random amounts, how well could you plan your finances? That’s the task we give our favorite charities with our irregular gifts.

Smart Tip #2: Plan to give to charities in monthly amounts throughout the year.
Did you know that many charitable organizations can accept gifts of stock directly from your non-retirement brokerage account? Why, you ask, would you do this? If you have highly appreciated stock (meaning it’s worth more than you paid for it), then you can avoid paying capital gains taxes on it by giving it away to the organizations that you were planning to donate to anyway. If you were to sell the same stock and give the net proceeds to your favorite charity, you’d first have to pay capital gains taxes on the difference between your original investment and the amount you sold it for. The charity you give the stock to has no such burden.

Smart Tip #3: Consider giving highly appreciated assets, such as stocks, directly to charity instead of giving cash or selling assets to give.

Advanced Giving Methods
You can also take advantage of many useful advanced giving methods.
For instance, a business owner who sells his business and comes into a large sum of money in one tax year might want to consider establishing what’s called a donor-advised fund. This approach would allow for a large, one-time deduction but also provide the donor discretion over how charitable gifts are made in future years. A retiree over age 70 ½, who doesn’t rely upon distributions from his or her IRA to live off of, might want to consider giving directly from his or her IRA.

This move has the potential to reduce the income tax burden from distributions the government requires every year.

Smart Tip #4: If you’re taking required minimum distributions from your IRA, but don’t need the distributions to meet living expenses, explore giving directly from your IRA to the charity of choice.

Legal structures can also be utilized to give more effectively such as different types of Charitable Remainder Trusts. Because of the potential tax implications, as well as the many rules and laws governing giving strategies, it’s important to have a trusted team of advisors in place. This team includes your tax preparer, attorney and financial advisor. These three professionals can collaborate with you and your family to find strategies that work best for your unique situation.

Smart Tip #5: Put together a team of trusted professionals, including an attorney, tax-preparer, and financial planner, to help you develop a tailored giving plan that fits your family’s needs.

Charity doesn’t have to be complicated, but it can pay off to be aware of the most effective ways to give. For giving strategies suited to your specific needs, meet with a team of professionals that you trust.

Disclaimer: This column is for informational purposes and should not be considered personalized investment, legal or tax advice. Everyone’s circumstance is different and individuals should seek advice based on their unique financial situation. All investments are subject to risk, including loss of principal.

By John N. Hall, CFP®