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Charitable Giving: Good for the Heart and Your 1040!

It may be better to give than to receive, but it may be even better to give and see your generosity rewarded. Charitable giving can play a valuable role in your financial and tax strategies. A well-planned gift to charity could provide an income tax deduction and a reduction of estate taxes. Your donation could also help you maintain financial security, exercise control over assets both during your lifetime and after death, as well as provide for your heirs in the manner you choose.

To accomplish all of these objectives, you need to develop a plan tailored to your individual circumstances. The following strategies can be used to create a giving plan that is both beneficial and appropriate for you.

When planned properly, gifts of appreciated property to charity may allow you to avoid the capital gains tax you would have owed when the asset was sold and may also allow you to receive an income tax deduction, usually worth the fair market value (FMV) of the property. Also, by removing that asset from your estate, you may reduce your potential estate tax burden.

If you wish to make a gift of property to a charity but also retain some control over it, a charitable remainder trust (CRT) may be an appropriate vehicle. A CRT is most effective when funded by an appreciating asset, such as real estate or stock in a family-owned business. After the property is transferred to the trust, the trust continues to provide income to the beneficiaries for a period of time, after which the remainder of the trust is donated to the charity. You avoid capital gains taxes on the assets you donated, and you receive a tax deduction on any interest earned by the remainder. Also, by removing the remaining value of the asset from your estate, you may reduce your potential estate tax liability. In short, you obtain the tax benefits of giving while postponing receipt of the gift by the charity.

If you wish to give to a charity without giving an asset away permanently, consider a charitable lead trust (CLT). Through a CLT, you essentially give the charity the use of an asset and the right to any income generated for a predetermined time. After the specified time has lapsed, the asset can revert to you or be given to whomever you choose. Appropriate assets might be income-producing stocks and bonds, your rare book collection, or a painting that you transfer to a museum for a certain length of time. You may receive a current income tax deduction for the value given to charity; however, the trust pays income tax on its income. If a CLT is created upon your death, estate tax liability may be reduced.

Early tax planning can help you make the most of your charitable giving opportunities and allow you to take advantage of additional benefits. Be sure to consult your team of qualified tax, legal, and financial professionals for specific guidance.

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