To Give or Not to Give: Is the Cost the Question?

A hallmark of the American way of life is our propensity to voluntarily share our prosperity with others. Altruism certainly motivates giving but so do personal reasons like passing on your values, establishing a legacy, and – yes – financial benefits. Our tax system provides personal financial incentives to make charitable contributions through income tax and estate tax incentives.

The tax law changes of 2001 and 2003 have reduced income tax rates for all taxpayers. The decline in your income tax rates, however, may actually mean it is less beneficial for you to give certain types of property to charity. With this in mind, you may be wondering if charitable giving should be a part of your financial plan going forward? The answer is still a resounding “Yes!” As the saying goes, the more things change, the more they remain the same. A charitable gift will still give you the personal rewards of giving, the ability to select the charity which will benefit from your gift, and the tax advantage of a charitable deduction which lowers your taxable income.

For these reasons, charitable giving still makes sense. So the next question to address is what type of property should you give? If you have appreciated property such as stocks, giving the appreciated property directly to charity brings an additional benefit as you may avoid capital gains tax that you would have had to pay had you instead sold the property and made a gift of cash. The new tax laws have also increased the advantage of giving tangible personal property if the gift is related to the purpose of the charity, such as giving a collection of books to the public library or art work to your local public museum.

As your income tax rates are reduced, you will want to pay more careful attention not only to what you give; but, also to when you give. With the greater difference between the tax brackets, timing your gifts can be essential to maximizing your tax advantages. A lump sum gift today may generate a larger tax advantage than a series of smaller gifts in the future. Putting a little more emphasis on the timing of your gifts may maximize your tax advantage.

When it comes to making a lump sum gift to charity, you may question how inclined you are to make a larger transfer of property outright to a charity, even your favorite charity, even to maximize your tax advantage. There are several charitable estate planning tools that you may use to provide you with a current charitable deduction when you place property in trust for the future benefit of a charity. The most familiar of these is the Charitable Remainder Trust (“CRT”) which gives you income from your property for a certain period of time. When the period passes, your named charity receives the remaining trust assets.

A CRT can play a valuable part in your estate plan by reducing your current income tax and your future estate tax due by reducing the size of your taxable estate. If you expect the estate tax to be reduced to zero in 2010, is there still an estate tax benefit to a CRT? The answer is “Yes!” again. In 2010, the estate tax is scheduled to be reduced to zero, only to be replaced by a loss of the step-up in basis; which, to put it simply, is just another type of “death tax.”

The tax law changes have not lessened the many benefits of charitable giving. Charitable giving still provides important advantages to you, your family and your community. Of course, maximizing the tax advantages of your charitable giving may require a little more planning under the new tax laws and this article has merely identified a few discussion points. For a more thorough review and before implementing or changing your charitable giving program, no matter the size, please consult with your tax or Financial Advisor.