The end of the year is a time when many people take stock of where they are in their lives, think about the causes they support and ways to give back to their communities.

Charitable contributions can reflect your personal values and have a positive impact for years to come. There are also year-end tax benefits of legacy donations, provided that your contributions are made to a charity that has tax-exempt status and you have the documentation to verify your donations on your income tax returns.

You might consider a national charity, such as The Salvation Army or the American Red Cross, or there could be a local or regional nonprofit, a community trust or foundation, or a volunteer organization that you’d like to support. Religious organizations, nonprofit schools, museums, and theaters are also popular when it comes to year-end donations.

While there are many admirable charities worthy of a legacy donation, you may wish to investigate any organization you intend to give to. Charity Navigator, CharityWatch, GiveWell, and the Better Business Bureau’s Wise Giving Alliance (Give.org) can be useful tools for getting information on a charity’s financial status, its reputation, and how it handles donations.

Year-End Giving Benefits and Tax Considerations

If you’d like to receive a tax break on your donations, the charity must be recognized by the Internal Revenue Service, and you must receive nothing in exchange other than gratitude.

Fortunately, the IRS offers a tax-exempt organization search tool where you can search by a charity’s name, location, etc.

Generally speaking, the IRS defines tax-exempt organizations to be “organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals.”

It also includes religious organizations, veterans’ organizations, volunteer fire companies, fraternal societies, and nonprofit cemeteries.

You can list your charitable donations on your income tax returns and deduct up to 60% of your adjusted gross income, depending on the type of contribution you make and the organization receiving it. This deduction limit applies to all your charitable donations within a year.

If you make any contributions that exceed this deductible limit, you might be able to carry over these deductions on your returns for the next five years.

In addition to verifying each charity’s tax-exempt status with the IRS, you might also consider asking each charity how much of your contribution would be tax-deductible. It’s not an unusual question to ask and they should be able to provide this information.

How to Maximize Impact and Leave a Legacy

While many charities need and rely on annual donations, legacy giving involves a large sum that can benefit an organization for many years.

Legacy donations are typically planned in accordance with estate planning, and not necessarily at the end of the year. Many legacy donors include their legacy donation plans in their wills, so the donation is made after they’re gone.

Of course, you may want to discuss your plans with your family, your tax preparer, and your accountant so you make sure they understand your objectives and will respect your wishes.

Let’s take a look at your many options for leaving a legacy.

Qualified Charitable Distributions

With a qualified charitable distribution, those who are 70.5 years or older can transfer $100,000 per year from an individual retirement account (IRA) and deduct 100% of it from their income taxes. Married couples who are both 70.5 years or older can transfer and deduct up to $200,000 per year.

The IRS allows this because the person making the donation doesn’t take possession of the donated funds. The transfer is made directly from their IRA account to the charity’s account.

When it comes to year-end charitable donations for legacy planning, a qualified distribution from your IRA account could be a way to maximize both your charitable giving and your tax deductions at the same time.

Appreciated Asset Donations

Appreciated assets are an investment that you had for more than a year and have gained in value, such as a stock portfolio, bonds, or mutual funds. By transferring this stock to a charity, you can likely deduct the market value of your stock holdings, up to the IRS deduction limits mentioned above. You can also save money on the capital gains taxes you would’ve paid if you had sold the stock yourself and contributed the proceeds instead.

Donor-Advised Funds

A donor-advised fund (DAF) is sort of a shorthand way of setting up a charitable fund, with someone else managing it. You would donate cash, stocks, or some other type of asset to a public charity, for which you can take a tax deduction.

The charity can invest and manage those funds and would have legal control over them, while you retain advisory privileges for the investment and distribution of those funds to charities that you support.

A Charitable Remainder Trust

With a charitable remainder trust, you would set up an irrevocable trust with your own assets, such as cash, stocks, real estate, or private business interests. The trust would provide income to you or your beneficiaries for life or for a period up to 20 years, while giving you a partial tax deduction. The charity you have selected will then receive whatever is left in the trust after the term.

Community Foundations

There may be a community foundation in your area that can assist you in setting up your own fund that they would manage and make charitable contributions based on your criteria. This can make it easy for you to leave a lasting legacy in your community without having to set up a foundation on your own.

Your Own Foundation

Setting up a foundation comes with benefits and drawbacks that you’ll need to consider. On the benefits side, once your fund has tax-exempt status from the IRS you could claim your own contributions as tax-deductible, while also accepting tax-free donations from others. You’d also have direct control over your own charity and be able to direct its work.

Many foundations are started in memory of a departed family member, with the charity’s goal of supporting disease research or helping those struggling with a particular condition. This way a family can secure the legacy of a loved one while carrying on with their work.

Of course, setting up your own charitable foundation isn’t easy and is going to take some resources. You’ll need to define the mission of your foundation, decide whether your legal status will be as a trust or a nonprofit corporation, and hire a lawyer who can guide you through the process.

You’ll also need to bring on a board of directors, apply for tax-exempt status and an Employer Identification Number (EIN) with the IRS.

If you’re not sure how to proceed or where to get started, we have a team of financial experts who can help you evaluate your options and make the right decision.

How Cogent Can Support Your Year-End Giving and Legacy Goals

At Cogent Bank, we understand the best practices for year-end legacy giving and offer a personalized service to all our Private Banking clients. Our financial advisory services can help you with legacy planning and donations, tax strategies, and meeting your long-term investment objectives.

If you have any questions on how to leave a legacy through charitable giving, we’re here to help you consider your options and discuss how you can have the maximum impact with your donations. Contact Bradley Lacore in our Private Wealth division to learn more.

Disclaimer

Disclaimer: The information contained herein is for informational/educational purposes only.  The views and opinions expressed in this document may be those of the individuals and may not necessarily reflect those of Cogent Bancorp and its subsidiaries and affiliates, or the entities they may represent. Content contained herein may be used in connection with the advertising and/or marketing of products offered by Cogent Bank or Cogent Private Wealth. The material is not intended to provide or substitute for legal, tax, or financial advice or to indicate the availability or suitability of any Cogent Bank product or service. You should consult with a legal, financial, tax, or other appropriate professional(s) for your specific needs and/or objectives before making any decisions.