How to Lend a Hand and Save Taxes

It seems like natural disasters are daily occurrences. While reading the newspaper over breakfast, we learn of a wildfire in Arizona. While driving to work, we hear of a drought in Africa and an epidemic in Southeast Asia. A hurricane in North Carolina, a flood in Missouri, a tornado in Oklahoma, an earthquake in California we feel empathetic for the victims, but often feel powerless to help. We are too far to fill sandbags and not close enough to the victims to lend a helping hand or a shoulder to cry on.

There are countless wonderful charities that provide assistance to stricken communities. The American Red Cross has disaster relief services specifically targeted for the victims of such traumatic events. Doctors Without Borders provides desperately needed medical care to sick children and adults without regard to geopolitical boundaries or ability to pay. Americans are known for their generosity in times of tragedy. There are ways to give while simultaneously saving taxes or providing for your own family. In our own community there is the Vera French Community Mental Health Center that offers invaluable care to those who are trying to deal with lifes tragedies.

Once you have decided that you want to help, the next step is determining the best way to do it. You could give cash outright. While this is the easiest and most common method, for larger donations, this typically is not the best method for the donor.

A simple but effective way to leverage your giving is to give appreciated property. You can get a deduction for the full fair market value of the property. If you were to sell the asset, normally you would pay 15 percent of the gain to the IRS. Lets say you decide to give a stock you paid $500 for, which is now worth $3,000. If you sold it, you would pay capital gains tax on the gain of $2,500, for $375 in tax. After taxes, you would have $2,625. However, if you contribute the property itself, you get a charitable deduction for the full $3,000. In other words, you get a deduction for the gain on which you never paid taxes.

You can contribute the asset to a Charitable Remainder Trust. With a Charitable Remainder Trust, you contribute property to a trust and you receive a fixed dollar amount or a fixed percentage of the value of the trust each year. At the end of a period, based on your life or that of a family member, or at the end of a term up to 20 years, the property goes to the charity you selected. While this does not provide the charity with an immediate benefit, you get a current income tax deduction for the value of the interest that eventually goes to charity. You can continue to control how the assets are invested. If you contribute appreciated assets, the gain is not immediately taxed to you upon the sale of the asset.

The reverse of a Charitable Remainder Trust is a Charitable Lead Trust. In this arrangement, you contribute assets to a trust that pays an income stream to the charity first and later pays out to you or your family. This is a way to reduce the estate or gift taxes on assets passing to your family.

There are many other ways to benefit charity, too. Once you decide that you want to help out, a qualified estate planning attorney, one whose practice focuses on estate planning, can help you help others by tailoring a plan to maximize your goals and the tax benefits when giving to charity.