strategic giving

Boost your tax-efficiency with a powerful strategic giving plan

Towards the end of the year, we all begin to think about giving. Do you know how to implement a year-round strategic giving strategy? Specifically, one that will reward you with tax benefits while allowing you to help make the change you want to see in the world? While giving comes in all shapes and sizes, there are three strategic ways you can help make a positive impact in your community and receive a tax benefit for your contribution.

There are year-end giving strategies you may already be familiar with that are touted to maximize your charitable contribution. For instance, there are numerous blog posts on gifting highly appreciated stock and qualified charitable distributions. The three giving ideas I will outline below go beyond the run of the mill strategies.

Kicking it off with EITC

Sometimes the most significant impact you can make is a local impact. For our Pennsylvania readers, consider taking advantage of the educational improvement tax credit (EITC). Thanks to a law passed in 2001, as a business owner or as an individual, you may use the EITC program to gift to a local educational organization while receiving a PA state tax credit in return. The longer you commit to giving, the higher your tax credit.

There are two distinctive paths to participate in this program, either as a business owner or as an individual. As a business owner, you must apply on July 1st. The program is so popular that if you delay, you likely will miss out on the $135 million of available tax credits. Businesses can receive up to $750,000 in tax credits through the program to offset taxable income.

If your business is approved, then you may make your contribution to the organization of your choice. Be careful to make your selection from the list of qualified scholarship organizations. The donation will not result in a dollar for dollar tax credit. Instead, it depends on how long your business elects to participate. If you pledge to participate for only one year, your donation will result in a tax credit of 75% of your donation. If you pledge to participate for two years, then your donation will result in a tax credit of 90% of your donation.

It works for individuals too!

As an individual, you may participate in the program via a ‘Special Purpose Entity’ (SPE), which is simply a group of people who would like to contribute capital to scholarship programs. This approach is a little more flexible than the business pathway; as an individual, you may join an SPE from May 15th to June 15th. The tax benefit is the same at the individual level. If you pledge to participate for only one year, your donation will result in a tax credit of 75% of your donation. If you pledge to participate for two years, then your donation will result in a tax credit of 90% of your donation.

The advantage here is that you are directing your PA state tax dollars to where you believe they should be spent. Not too often can you do that as a citizen. You have control of your charitable gift, and you get rewarded for giving with what can be a sizeable reduction in your state tax bill — not a bad deal.

Another option

Now that you have one more arrow in your quiver, what other strategic giving strategies are available? Charitable remainder trusts can be one option that provides the best of both worlds (in certain situations). The result is two-fold, the creation of an income stream for you and a charitable donation.

There are two main charitable remainder trust structures, a charitable remainder unit trust (CRUT) and a charitable remainder annuity trust (CRAT). As the name indicates, a CRAT allows for a fixed annuity amount each year, and additional contributions are not permitted. Whereas a CRUT provides for a fixed percentage based on the value of the trust assets, and you may add assets to the trust over time.

There are a few advantages to using a charitable remainder trust. The tax benefits tend to be a driving factor in choosing to incorporate either a CRAT or CRUT in a comprehensive estate plan. Due to the recent tax code changes, many taxpayers are no longer itemizing their deductions, including charitable donations.

However, by deciding to use a charitable remainder trust, you may make use of the charitable deduction with a significant transfer of assets to the trust. Another benefit is that the assets will be exempt from your estate tax calculation, as they are in the trust ownership.

Lastly, the investment income from the trust is tax-exempt. Therefore, this strategy could be a valuable piece of your overall tax plan. The suitability must be evaluated in each situation. The question of including a charitable remainder trust in a comprehensive plan must consider the type of trust, the assets themselves, the income need from the trust, the desired charitable impact, and the tax impact.

By selecting to include a trust in your financial plan, you have the choice of which trust vehicle meets your needs. Thus, giving you control over the income stream that suits you. At the end of the trust’s lifespan or the death of the beneficiary, the desired impact will live on through the charity you selected initially.

Choose wisely

The caveat is that these trusts are irrevocable; once you make your choice, you are locked in. There are a few pieces that can be updated, but the strategy cannot be unwound. Therefore, this approach must be very carefully evaluated by including the appropriate professional parties. The preparation of this strategy will consist of the creation of a trust; the cost of using this approach must be factored into consideration as well.

Immediate benefits

One final strategic giving strategy to consider is a donor-advised fund. The pros here are simplicity, an immediate tax deduction, and control over which charity will receive the funds. Donor-advised funds essentially function as an investment account. Depending on which company holds the donor-advised fund, you may have some limitations on the investment options.

The first step is to identify the scope of your donation. The gift may include cash, highly appreciated stock, real estate, among other categories. The most tax advantageous for the giver is, of course, to gift highly appreciated investments from taxable accounts.

Then you make the transfer to the donor-advised fund, select the investments, and the assets continue to grow. As soon as you make the transfer, you will receive a tax deduction. The magnitude of that deduction is dependent on the gift itself.

Gift that keeps on giving

While the assets are in the donor-advised fund, you may select charities to direct the funds. Similar to the CRAT/CRUT strategy, you must be sure to choose eligible charities that are IRS qualified, such as 501(c)(3) charities.

What is best for you?

There are multiple strategic giving options to maximize your charitable impact while gaining control over your tax obligations. The correct approach depends on your intent, the complexity of your financial position, and the size of your intended gift. The moral of the story is that across the spectrum from the most straight forward, the donor-advised fund, to the more complex the CRUT/CRAT, you have options.

As we approach the giving season, please share this blog with those who may benefit. I would be happy to have a conversation and discuss how one of these strategies may fit into your overall financial plan.