3 Biggest myths about giving to charity, taxes, and financial planning
What you need to know
1. Myth: Writing a check is always the best way to support a charity.
Charities love receiving cash. Who doesn’t? But it’s not necessarily the most advantageous way for you to make charitable gifts.
Own stock? It could be a better option. The shares in your brokerage account are probably “publicly traded,” which means they’re sold on the New York Stock Exchange, NASDAQ, or something similar.If those shares have grown in value since you purchased them and you’ve held them at least a year, then you’ve probably got a great asset to give to charity.
Here’s why: When you give this stock to a public charity like Duke University, you get an income tax deduction. That deduction is based on the stock price of those shares – the amount that it would take to buy or sell those shares on the day that they are received by the charity.
Plus, you would not be subject to taxes on the gain that’s built up in those shares.When the charity sells the shares, capital gains taxes are avoided because the charity is a tax-exempt entity and doesn’t pay tax. Nice!
Donating publicly traded shares is also easy to do. Most often, it’s simply a matter of having your broker or bank call the charity directly to initiate the transfer.
Please note that this great technique doesn’t usually work for shares you hold in a retirement account. (For retirement account giving, see Myth #3.)
Are you still with me? Great! Let’s move on to the next one…
2. Myth: Only rich people need to think about tax-driven giving strategies.
Not true. Anybody who itemizes their deductions on their tax return can take advantage of the tax benefits of charitable giving.You just need to tell the IRS at tax time about the expenses you incurred that can reduce your tax bill.
Do you have a home mortgage? If so, you probably itemize your deductions because the government gives you a tax break on your mortgage interest. So why not add a few deductions – and save even more on taxes – by making a few charitable gifts?
Take that, tax man.
3. Myth: If you want to leave money to a charity when you pass away, you should simply name the charity in your will.
You’ve probably heard the saying, “You can’t take it with you.” And because it’s true, many folks leave a bit of their estate to charity at their death.
This is often called a “bequest,” and it’s the source of critically needed support for charities far and wide. But it may not always be the best way to leave a legacy at a place you care about.
Instead, consider your retirement plan – your 401(k), IRA, etc. If you’re like many Americans, these accounts could make up a significant source of your net worth. And while these accounts offer some great tax advantages as you’re building up money for retirement, the catch is that these accounts can be taxed harshly if you leave them to loved ones at your death. When an heir (even your spouse) takes money out of these plans, he or she will probably owe ordinary income tax on those withdrawals.
Plus, if you’re subject to estate taxes, your estate may owe 40 percent of the value of your plans to Uncle Sam. That’s two layers of tax on one account. Ouch!
On the other hand, if you leave the retirement plan assets to charity, neither federal estate nor income taxes are imposed. One hundred percent of a retirement plan left to charity will be received by your designated nonprofit.
Leaving assets to charity from your retirement account is easy to do.Simply fill out the beneficiary designation form that is provided by the company administering your plan and specify the percentage or dollar amount that you would like to go to charity, leaving the rest to family and friends.
If you plan on leaving retirement assets to a charity, give the organization a call and let the folks there know about it.The charity may allow you to designate how your retirement account gift will be used.
At Duke, for example, you could direct your gift to provide need-based scholarships, support research in a specific field, or help one of the many beautiful spaces on campus (such the Chapel, the Duke Gardens, the Nasher Museum of Art, or the Libraries).
I’ve shared my top 3. What would you add?
General rules to know about this blog post: I can’t give you legal, tax or financial advice. This blog post covers only general rules, doesn’t consider state tax issues, and is summarized to be pithy and fun to read…legal, tax, and financial advice is neither pithy nor fun to read. So please talk to your own advisors. They know much more about your specific situation and how the general rules discussed here apply to you. Of course, I’d be delighted to talk to your advisors directly if you think it would be helpful. Now here’s a very technical way of saying all of that stuff again: This communication (including any enclosures or attachments) is not intended or written to be used, nor can it be used, for the purpose of avoiding tax-related penalties. All materials (including any enclosures or attachments) are provided for informational purposes only and shall not be considered or construed as legal, tax or financial advice. Please consult your own expert counsel on all legal, tax or financial matters related to any contemplated gift or otherwise. An attorney employed by Duke University cannot serve as your personal advisor.