Paying charities instead of income tax (CLAT?)
-
- Posts: 675
- Joined: Sun Apr 03, 2011 9:08 pm
Paying charities instead of income tax (CLAT?)
I'm expecting to realize a decent amount of capital gains this year and I'd like to find a way to minimize the associated tax burden but I haven't been able to find a legal way of doing so. I'm switching gears now and trying to find a way to as efficiently as possible donate to charity instead of paying the associated income tax. I'm sure this can't be done on a 1:1 basis (ie avoiding $1 in tax for every $1 donated) but I'd like to get as close to that as possible.
Any advice for how best to accomplish this? I've heard that a charitable lead annuity trust (CLAT) is a good tool.
Any advice for how best to accomplish this? I've heard that a charitable lead annuity trust (CLAT) is a good tool.
Re: Paying charities instead of income tax (CLAT?)
A charitable remainder trust is a way for someone who regularly makes gifts to charity to transfer wealth to the next generation free of estate and gift tax.
For example, suppose you give $100,000 a year to charity. At current interest rates, you could put about $1,880,000 into charitable lead trust that pays $100,000 a year to charity for 20 years, or about $1,431,000 into a charitable lead trust that pays $100,000 a year to charity for 15 years. The value of the charity's interest is about equal to the contribution, so there's little or no taxable gift. At the end of the 15 or 20 years, whatever is left goes to or in further trust for your family free of estate and gift tax.
If the trust is a grantor trust for income tax purposes, you may deduct the value of the charity's interest, though you'll be taxable on the trust's income and gains. If it's a separate taxpayer, you may not deduct the value of the charity's interest, but the trust will get an income tax deduction for the distributions to charity.
For example, suppose you give $100,000 a year to charity. At current interest rates, you could put about $1,880,000 into charitable lead trust that pays $100,000 a year to charity for 20 years, or about $1,431,000 into a charitable lead trust that pays $100,000 a year to charity for 15 years. The value of the charity's interest is about equal to the contribution, so there's little or no taxable gift. At the end of the 15 or 20 years, whatever is left goes to or in further trust for your family free of estate and gift tax.
If the trust is a grantor trust for income tax purposes, you may deduct the value of the charity's interest, though you'll be taxable on the trust's income and gains. If it's a separate taxpayer, you may not deduct the value of the charity's interest, but the trust will get an income tax deduction for the distributions to charity.
- FelixTheCat
- Posts: 2035
- Joined: Sat Sep 24, 2011 12:39 am
Re: Paying charities instead of income tax (CLAT?)
Why don't you get a Donor Advised Fund? Donate the appreciated equity and get the write off. Then you can schedule grants for any charity in the time you desire.
Here's Fidelity's version https://www.fidelitycharitable.org/
Here's Fidelity's version https://www.fidelitycharitable.org/
Felix is a wonderful, wonderful cat.
Re: Paying charities instead of income tax (CLAT?)
If the sale isn't certain, a charitable remainder trust will spread out the gain over many years.
Another possibility, depending on the state, might be a trust that will pay Federal but not state income tax on the gain.
More information is needed. The original poster may want to consult with competent tax/estates counsel.
Another possibility, depending on the state, might be a trust that will pay Federal but not state income tax on the gain.
More information is needed. The original poster may want to consult with competent tax/estates counsel.
-
- Posts: 675
- Joined: Sun Apr 03, 2011 9:08 pm
Re: Paying charities instead of income tax (CLAT?)
How do gift and estate taxes work if you instead put your assets in a trust that the next generation is the beneficiary of?
In what ways is a Donor Advised Fund better than just making the donation directly?FelixTheCat wrote: ↑Fri Feb 05, 2021 4:05 pm Why don't you get a Donor Advised Fund? Donate the appreciated equity and get the write off. Then you can schedule grants for any charity in the time you desire.
How does that work?
Re: Paying charities instead of income tax (CLAT?)
If you contribute assets to a trust, the contribution will generally be a taxable gift. However, you'll get the future income and growth out of your estate.boglerocks wrote: ↑Sun Feb 07, 2021 3:26 pm
How do gift and estate taxes work if you instead put your assets in a trust that the next generation is the beneficiary of?
In what ways is a Donor Advised Fund better than just making the donation directly?
How does that work?
The benefits of a donor advised fund compared to private foundation are that you get the higher deduction limits for contributions to public charities, it's easier to make anonymous or foreign grants, and since the costs are based on assets it's less expensive for smaller amounts. The benefits of a private foundation are that your name can be on it, you have a greater degree of control, and since the costs don't vary much based on assets it's less expensive for larger amounts.
The benefits of either of them compared to an outright gift to charity are that you have a greater degree of control.
Different states have different ways of determining when a trust is taxable in that state. Some states look to the domicile of the grantor or testator (and some of those states don't tax a trust if there's no ongoing connection to that state). Some states look to the domicile of the trustees, or the place where the trust is administered. There are many variations. As a result, it's often possible (and we often try to have) a trust that's not taxable in any state.
Re: Paying charities instead of income tax (CLAT?)
Best thing about a DAF is convenience; give $500/month to your animal shelter with just a few keystrokes..done. Write 12 checks and you must keep some type of records for years in case of audit. Also you can invest the DAF contributions, ours at Schwab is in their balanced portfolio. We funded all our charities from the DAF for 2021 last month since market has been so high. I know, market timing.
Someone else mentioned direct transfer of appreciated stocks/shares to your DAF--that's a great idea. If you invested $10,000 in a stock 5 years ago and it's now worth $50,000, doing a direct transfer of that stock to your DAF gives you a $50,000 charitable deduction on your tax return. Of course benefit is better the higher your bracket. Hope this helps!
Someone else mentioned direct transfer of appreciated stocks/shares to your DAF--that's a great idea. If you invested $10,000 in a stock 5 years ago and it's now worth $50,000, doing a direct transfer of that stock to your DAF gives you a $50,000 charitable deduction on your tax return. Of course benefit is better the higher your bracket. Hope this helps!
-
- Posts: 3595
- Joined: Fri Dec 26, 2014 3:19 pm
Re: Paying charities instead of income tax (CLAT?)
Check whether your state has tax credits for charitable contributions. Maybe Duck Duck Go "MyState tax credits charity"
In my state, food pantries and some children's services charities can give state tax credits to people who make significant (~$1K+) donations.
- you donate $1K, and can deduct that donation on your state and federal taxes
PLUS
- you get a $500 tax credit/reduction in state taxes owed.
Since the federal standard deduction is pretty high, and state tax deductions are pegged at $10K, most people don't itemize so the tax deduction might not do you much good, but the tax credits are still cool.
In my state, food pantries and some children's services charities can give state tax credits to people who make significant (~$1K+) donations.
- you donate $1K, and can deduct that donation on your state and federal taxes
PLUS
- you get a $500 tax credit/reduction in state taxes owed.
Since the federal standard deduction is pretty high, and state tax deductions are pegged at $10K, most people don't itemize so the tax deduction might not do you much good, but the tax credits are still cool.
Re: Paying charities instead of income tax (CLAT?)
What is the source of this capital gains? Is it avoidable or are there ways to delay it?boglerocks wrote: ↑Fri Feb 05, 2021 3:41 pm I'm expecting to realize a decent amount of capital gains this year and I'd like to find a way to minimize the associated tax burden but I haven't been able to find a legal way of doing so. I'm switching gears now and trying to find a way to as efficiently as possible donate to charity instead of paying the associated income tax. I'm sure this can't be done on a 1:1 basis (ie avoiding $1 in tax for every $1 donated) but I'd like to get as close to that as possible.
Any advice for how best to accomplish this? I've heard that a charitable lead annuity trust (CLAT) is a good tool.
Do you have other income to offset the capital gains if you donate it? Or if you over-donate, be sure you can carry forward any overages.
Yeah, 1:1 transferring your tax liability to a charity would be a feat. Best you can do is reduce taxable income and receive donation deductions. What's your tax rate? You might be able to get about 2/3 the way there.
Do you have a charity in mind? For the whole amount? DAF allows you to defer decisions for later.
Re: Paying charities instead of income tax (CLAT?)
A DAF is especially useful if you don't itemize deductions every year. You can transfer a large amount of highly appreciated stock to the fund and claim a deduction in a year you plan to itemize, then pay the money out to charities over years in which you take the standard deduction.In what ways is a Donor Advised Fund better than just making the donation directly?
-
- Posts: 675
- Joined: Sun Apr 03, 2011 9:08 pm
Re: Paying charities instead of income tax (CLAT?)
If I contribute appreciated stock to a DAF this year do I take the full value of that stock as a deduction this year?
Can I then donate stock from the DAF to charity over several years?
If the stock continues to appreciate in the DAF, what happens to the difference between the eventual value of the stock and it's value when I contributed it?
Can I then donate stock from the DAF to charity over several years?
If the stock continues to appreciate in the DAF, what happens to the difference between the eventual value of the stock and it's value when I contributed it?
-
- Posts: 81
- Joined: Thu Apr 16, 2015 8:35 am
Re: Paying charities instead of income tax (CLAT?)
Yes, if stock gains are long term capital gains. If short term capital gains, then you can only deduct the cost basis.boglerocks wrote: ↑Fri Feb 12, 2021 8:24 am If I contribute appreciated stock to a DAF this year do I take the full value of that stock as a deduction this year?
Can I then donate stock from the DAF to charity over several years?
If the stock continues to appreciate in the DAF, what happens to the difference between the eventual value of the stock and it's value when I contributed it?
No. Most DAFs will liquidate the stock immediately upon contribution barring some unique circumstances, and even then it’s usually non-binding. And even if they allow your DAF to continue holding the stock, they will liquidate the stock when making a charitable grant. With that said, most institutions will allow you to reinvest the liquidated funds in a relatively low cost index fund type portfolio. At that point, you can make a grant to a charity over time, at whatever frequency, so long as you have funds available to grant. Depending on the institution, DAFs may have limits on the grant amount (e.g. Fidelity has a $50 minimum grant versus $500 at Vanguard).
Any appreciation on the invested portion of your DAF is tax free and will eventually benefit your charities through a larger amount of money for you to eventually grant to those charities. You will not get any additional direct tax benefit from the appreciation beyond not being taxed on the capital gains or dividends while the money is in the DAF.
Last edited by Gus Chiggins on Fri Feb 12, 2021 4:49 pm, edited 5 times in total.
-
- Posts: 1408
- Joined: Sat Dec 05, 2015 3:33 pm
Re: Paying charities instead of income tax (CLAT?)
Yes, as long as you had held the stock for at least a year. (If you held the stock foot less than a year before donating it to the DAF, then you can only deduct the cost basis.)boglerocks wrote: ↑Fri Feb 12, 2021 8:24 am If I contribute appreciated stock to a DAF this year do I take the full value of that stock as a deduction this year?
Can I then donate stock from the DAF to charity over several years?
If the stock continues to appreciate in the DAF, what happens to the difference between the eventual value of the stock and it's value when I contributed it?
No, that is not how it works. When you donate the stock to the DAF they will dispose of it and you will then invest the proceeds in any of the investment options the DAF offers, such as an S&P 500 Index Fund.
No, as previously stated, the stock will be disposed of by the DAF when you donate it to the DAF.
-
- Posts: 2533
- Joined: Fri Nov 20, 2015 9:26 am
Re: Paying charities instead of income tax (CLAT?)
The OP premise is to avoid capital gains taxes on realized gains. Some suggest a DAF.
Lets see if I have this right.
I have 10k capital gains to realize.
Assume 15% tax on this. I don't want to pay that.
Norm would be 10K in my pocket minus 15%, which would have left me with $8500.
But I donate 10k to a DAF.
Now I have a tax deduction of 10k, instead of paying $1500 in tax.
But, I don't have the $8500 either.
How is this beneficial to me?
Lets see if I have this right.
I have 10k capital gains to realize.
Assume 15% tax on this. I don't want to pay that.
Norm would be 10K in my pocket minus 15%, which would have left me with $8500.
But I donate 10k to a DAF.
Now I have a tax deduction of 10k, instead of paying $1500 in tax.
But, I don't have the $8500 either.
How is this beneficial to me?
-
- Posts: 2212
- Joined: Tue May 21, 2013 8:49 pm
Re: Paying charities instead of income tax (CLAT?)
As far as I know, in all cases, you will have less money than if you just paid your taxes and kept the remainder. The best one I've heard of is donating highly appreciated stock. Let's say you have a stock that's gone up 10x, and you have a lot of income. By donating it, you avoid the ~25% LTCG and NIIT taxes that you'd have owed, plus your state's 10%. Then you get a tax deduction for the full amount, saving you 37% (b/c you have more than that amount of income in just the 37% bracket).
Putting numbers to it:
a) Donate Appreciated Stock. If you donated 100K of this stock, you get to keep 35K (in tax benefit), but the charity gets 100K.
b) Pay taxes and keep the money. If you sold it, and kept the money, you get to keep 68.5K (owing 35% on 90K in gains)
c) Sell stock, pay taxes, and then donate all of the remainder. If you sold it, and then donated the 68.5K left after taxes, then you have nothing, but the charity gets 68.5K. The charity get 46% more if you donated the stock directly.
Note that this showcases a nearly-best case scenario, in terms of reaping a personal benefit from donating.
1) Almost all of the donation represents gains. Most times, the stock hasn't gone up 10x. If it hasn't gone up that much, then you owe less tax when selling it, and would keep more of it in scenario b)
2) This assumes you're already itemizing enough to exceed the standard deduction. For example, if your (prop/income tax) deductions are the SALT limit of $10K, then the first 15K (to bring itemized donations up to match the standard deduction) of donated stock is "wasted," which represents a $5.5K loss in benefit. So in scenario 1, the tax benefit is $30K rather than $35K. This implies that, if you normally take the standard deduction, to make scenario b) more worthwhile, you need to donate *big*.
But if you donate big, you benefit most only if you have enough income in the highest bracket, above $622K.
To use less theoretical numbers, if you're donating 30k of stock that's doubled from where you bought it, and you're well into the 24% bracket, in a state with no income tax, then
a) donate 30K, assume you get 15K in deductions with a value of 3.6K, charity keeps 30K
b) keep $27.7K after taxes (paid 15% on 15K of gains)
c) you have 0, charity has 27.7K. The charity gets 8% more if you'd donated the stock directly
If you're going to donate, you can be better off donating highly-appreciated stock. The benefit to you begins after you've reached the standard deduction, and it's more valuable if you're in a high tax bracket, and if you're paying a lot of state taxes too. In all cases, the benefit to you isn't anywhere close to how much you'd keep if you didn't donate to charity at all. But if you were going to donate anyways, consider donating the stock directly. A DAF makes this easy.
Putting numbers to it:
a) Donate Appreciated Stock. If you donated 100K of this stock, you get to keep 35K (in tax benefit), but the charity gets 100K.
b) Pay taxes and keep the money. If you sold it, and kept the money, you get to keep 68.5K (owing 35% on 90K in gains)
c) Sell stock, pay taxes, and then donate all of the remainder. If you sold it, and then donated the 68.5K left after taxes, then you have nothing, but the charity gets 68.5K. The charity get 46% more if you donated the stock directly.
Note that this showcases a nearly-best case scenario, in terms of reaping a personal benefit from donating.
1) Almost all of the donation represents gains. Most times, the stock hasn't gone up 10x. If it hasn't gone up that much, then you owe less tax when selling it, and would keep more of it in scenario b)
2) This assumes you're already itemizing enough to exceed the standard deduction. For example, if your (prop/income tax) deductions are the SALT limit of $10K, then the first 15K (to bring itemized donations up to match the standard deduction) of donated stock is "wasted," which represents a $5.5K loss in benefit. So in scenario 1, the tax benefit is $30K rather than $35K. This implies that, if you normally take the standard deduction, to make scenario b) more worthwhile, you need to donate *big*.
But if you donate big, you benefit most only if you have enough income in the highest bracket, above $622K.
To use less theoretical numbers, if you're donating 30k of stock that's doubled from where you bought it, and you're well into the 24% bracket, in a state with no income tax, then
a) donate 30K, assume you get 15K in deductions with a value of 3.6K, charity keeps 30K
b) keep $27.7K after taxes (paid 15% on 15K of gains)
c) you have 0, charity has 27.7K. The charity gets 8% more if you'd donated the stock directly
If you're going to donate, you can be better off donating highly-appreciated stock. The benefit to you begins after you've reached the standard deduction, and it's more valuable if you're in a high tax bracket, and if you're paying a lot of state taxes too. In all cases, the benefit to you isn't anywhere close to how much you'd keep if you didn't donate to charity at all. But if you were going to donate anyways, consider donating the stock directly. A DAF makes this easy.
-
- Posts: 2212
- Joined: Tue May 21, 2013 8:49 pm
Re: Paying charities instead of income tax (CLAT?)
Oh, oh, oh. I did hear about a situation where donating charities pays off better than dollar-for-dollar. There's a catch though, in that you also have to die.
Some states have an estate tax, and New York State has it structured such that there's a cliff effect. If you're below a threshold, there's no tax. If you cross that threshold, then there's a tax on the entire estate, and not just the portion over the threshold. In an edge case, donating $70K can save you $170K in taxes!
https://www.wealthspire.com/blog/new-yo ... tax-cliff/
Some states have an estate tax, and New York State has it structured such that there's a cliff effect. If you're below a threshold, there's no tax. If you cross that threshold, then there's a tax on the entire estate, and not just the portion over the threshold. In an edge case, donating $70K can save you $170K in taxes!
https://www.wealthspire.com/blog/new-yo ... tax-cliff/
-
- Posts: 81
- Joined: Thu Apr 16, 2015 8:35 am
Re: Paying charities instead of income tax (CLAT?)
DAFs are used in lieu of making cash contributions to charities. In and of themselves, they don’t create a benefit.Shallowpockets wrote: ↑Fri Feb 12, 2021 9:23 am The OP premise is to avoid capital gains taxes on realized gains. Some suggest a DAF.
Lets see if I have this right.
I have 10k capital gains to realize.
Assume 15% tax on this. I don't want to pay that.
Norm would be 10K in my pocket minus 15%, which would have left me with $8500.
But I donate 10k to a DAF.
Now I have a tax deduction of 10k, instead of paying $1500 in tax.
But, I don't have the $8500 either.
How is this beneficial to me?
In other words, in COMPARISON to a cash donation, you’re better off donating the highly appreciated shares because you get to avoid capital gains tax on the appreciation, and also (assuming you itemize that year) get an income tax deduction based on the full value of the shares at time of contribution (so long as they are long term gains). They also allow you to bunch several years worth of donations so that you can itemize deductions when you might not normally have enough donations to itemize if donations were spread over several years, all while still allowing you to spread your actual charitable grants over several years. You can then take the cash you would have donated and buy the same number of donated shares effectively giving you a stepped up cost basis.
But if you don’t already donate to charity or don’t plan to donate to charity, then a DAF isn’t really going to benefit you. It’d be like buying a work truck for a tax deduction when you don’t need another work truck.
Last edited by Gus Chiggins on Fri Feb 12, 2021 4:55 pm, edited 2 times in total.
-
- Posts: 1408
- Joined: Sat Dec 05, 2015 3:33 pm
Re: Paying charities instead of income tax (CLAT?)
If I remember correctly the simplified example that I gave my wife:Shallowpockets wrote: ↑Fri Feb 12, 2021 9:23 am The OP premise is to avoid capital gains taxes on realized gains. Some suggest a DAF.
Lets see if I have this right.
I have 10k capital gains to realize.
Assume 15% tax on this. I don't want to pay that.
Norm would be 10K in my pocket minus 15%, which would have left me with $8500.
But I donate 10k to a DAF.
Now I have a tax deduction of 10k, instead of paying $1500 in tax.
But, I don't have the $8500 either.
How is this beneficial to me?
If we have $100,000 of stock that cost us very little, we could:
Sell it, pay 20% capital gains tax and 4% Medicare tax, leaving us $76,000
OR
We could donate it to a DAF and get a tax deduction of 37%, worth $37,000
In other words, it would cost us $39,000 to donate $100,000 to charity if we gave highly appreciated stock to a DAF.
If you have no desire to donate to charity, this wouldn’t interest you. But, if you do want to donate to charity, this is a very cost effective way of doing so.