We wanted to let our parishioners know some of the charitable giving strategies available under current tax law to include St. Joseph in their annual budget and estate planning. Some of these strategies allow for either increased income tax deductions or reduced estate taxes. When utilizing these strategies you may be able to increase your total donation to the parish without incurring additional taxes. As with any issue dealing with taxes or legal issues, please consult with your CPA or attorney. This will give you a basis for having a meaningful conversation.
One of the easiest and most straightforward ways of giving to the parish is by writing a check to the parish. If you itemize your deductions, you can take a tax deduction for the amount given to all charities for the year up to 50% of your adjusted gross income.
Donating assets, (such as stocks, mutual funds, real estate) that have appreciated in value since you acquired them is an excellent way to give to our parish and be able to recognize some tax benefits. First, since you are donating the appreciated assets to a non-profit organization, you do not have to pay capital gains tax on the appreciated value. Then the non-profit organization will not have to pay taxes either since they are tax-exempt. In addition you are able to take a tax deduction, if you itemize your deductions, for the fair market value of the assets at the time of donation up to 30% of your adjusted gross income. The total amount given to all charities for the year is limited to 50% of your adjusted gross income.
Example: You donated some stock to our parish that you had bought several years ago and purchased it for a total of $5,000. Today that stock is valued at $10,000. If you were to sell that stock, paying capital gains tax of probably 15% ($750), you would be left to donate only $9,250. If you had donated the stock to the parish, you would have saved yourself the $750 of capital gains tax and also been able to take a tax deduction of $10,000. If you were in the 28% tax bracket that would save you $210 more in taxes from the $750 higher deductible amount. The total benefit between the parish and the person making the donation would have amounted to $1,710. The person making the donation would save $960 and $750 more for the parish.
A charitable remainder trust (CRT) is an irrevocable, tax-exempt trust that has a split interest. You place assets in the trust to provide income for yourself for your lifetime or a period of time not to exceed 20 years. At the end of the trust term, the assets inside the CRT get passed to the designated charitable beneficiaries. You can fund the trust with a variety of assets to include stocks, bonds, mutual funds, and real estate. The donor receives an upfront charitable deduction equal to the present value of the remainder interest. The donor is also responsible for paying any income tax on the distributions from the CRT. The nature of the income that is distributed is retained as it was inside of the trust.
Example: There was qualified dividend income, from common stock, and that was distributed to the donor. The donor would be taxed at the current tax rate of 15% instead of ordinary income. Very often donors contribute highly appreciated assets to the CRT and then the assets can be sold within the CRT and the gain is not subject to tax until it has been distributed.
There are three types of CRT's. First is the charitable remainder annuity trust which pays a fixed dollar amount each year. Second is the charitable remainder unitrust which pays a fixed percentage of the trust value each year. Third is the charitable pooled income fund which is set up by the charity enabling many donors to contribute. Donors receive variable income for life from the fund based upon performance of the investments.
The benefits of a CRT is that in many cases there are no capital gains taxes paid on assets transferred to and then sold through a charitable trust. The donor also has the potential to generate substantial income for life or a specified period of time. The donor also receives an income tax deduction.
By establishing the CRT you relinquish your rights to the assets you donate to the trust. Another consideration is that your heirs will not inherit the assets donated to the trust. One way to address this concern is to purchase a life insurance policy with some of the income generated from the CRT.
A charitable lead trust (CLT) is an irrevocable trust that pays income to a charity for a specified period of time and then leaves the remainder of the trust to the specified beneficiaries who are usually family members.
The purpose of the CLT is to reduce taxes on the estate of the deceased while maintaining control over the assets. A CLT can be set up while you are alive or upon your death. If the CLT is set up during your lifetime as a grantor trust, then you can claim an income tax deduction when the trust is funded. If the trust is not set up as a grantor trust, then you get no income tax deduction when the trust is funded deductible against the trust's income. Because of the delay in the transfer of assets to your beneficiaries, your donation is valued at discounted present value, based on IRS tables, for tax purposes. Transferring assets in a CLT not only reduces the size of your estate for estate tax purposes but also eliminates potential capital gains tax on any increase of the assets inside of the trust. A CLT works well if you have assets which are likely to increase in value far faster than the IRS assumed rate of interest or if valuation discounts can be claimed to reduce the value of the assets going into the trust.
Remainder interest in a personal residence or farm requires making an irrevocable transfer of a personal residence to St. Joseph - Honey Creek and the donor being able to retain lifetime enjoyment of the property. The donor will continue to live in the house, pay the required property taxes, and maintain the house for life. The retained life interest can be on one or two lives (upon the second to die of husband and wife). The parish receives the house after the death of the retained life interest. The benefits of the remainder interest in a personal residence or farm are that you receive an immediate income tax deduction, lifetime use of your house or farm, reduce the size of your taxable estate and help the parish maintain their facilities and the ministries they serve.