Alternatives

Donating a Car to Charity

If you donate your car to charity, you may claim a tax deduction for the donation if you itemize your deductions on your federal income tax return.

To get started, you'll need to pick a qualified charitable organization, determine the fair market value (FMV) of your car, and obtain the necessary documentation for your donation.

Pick a Qualified Charity

Your donation won't be tax deductible unless you make it to a qualified organization. Generally, the most common types of qualified organizations are Section 501(c)(3) organizations such as charitable, educational, or religious organizations. To determine if an organization is qualified, you can check Internal Revenue Service (IRS) Publication 78, Cumulative List of Organizations. This publication is available on the IRS website, www.irs.gov.

You can also call the IRS Customer Account Services division for Tax Exempt and Government Entities toll-free at (877) 829-5500 to find out if an organization is qualified.

Determine Your Car's Fair Market Value

When you donate your car to charity, you must first determine its fair market value. The FMV represents the maximum deduction you may take on your federal income tax return.

Certain commercial firms and trade organizations publish monthly or seasonal guides for different regions of the country that contain dealer sale prices or average dealer prices for recent model cars. While these prices are not "official" and the publications are not considered appraisals of any specific donated property, they do provide clues for making an appraisal and suggest relative prices for comparison with current sales and offerings in your area.

However, FMV may be affected if your car has engine trouble, body damage, high mileage, or excessive wear. For the FMV of your car to be considered the same as the price listed for a private party sale in such a guide, that price must be for a car that is the same make, model, and year as yours, and that is sold in the same area, in the same condition, and with the same or similar options, accessories, and warranties as your car. In certain circumstances, if the tax deduction you claim for your car is greater than $5,000, you may need a written appraisal of the car's FMV from a qualified appraiser. The appraisal must be made no more than 60 days before you donate the car.

Obtain the Necessary Documentation

For deductions of less than $250, you'll need a receipt (a letter from the organization will suffice) that shows the name of the organization to which you made the donation, the date and location of your contribution, and a reasonably detailed description of the car. You'll also need a record of the FMV of the car (and how you determined it) at the time of the contribution.

If you claim a deduction of $250 or more, you'll need a contemporaneous written acknowledgment of your donation. In addition to information about the organization, the date and location of your contribution, and a description of the car, this acknowledgement must include one of the following:

  1. A statement that no goods or services were provided by the charity in return for the contribution, if that was the case
  2. A description and good-faith estimate of the value of any goods and services that the charity provided in return for the contribution, or
  3. A statement that goods or services that the charity provided in return for the contribution consisted entirely of in

If you claim a deduction of more than $500, the charity must use IRS Form 1098-C as the acknowledgement. This form will indicate that the charity either:

  1. Sold the car in an arm's-length transaction to an unrelated party (the date of the sale and the sale's gross proceeds will be listed)
  2. Will make a significant intervening use of or material improvement to the car before transferring it, or
  3. Will give the car, or sell it for a price well below its FMV, to a needy individual in furtherance of its charitable purpose

If the charity elects either of the last two options listed above, it must send you Form 1098-C within 30 days of your donation; otherwise, you must be sent Form 1098-C within 30 days of the sale of your car. You must attach a copy to your return.

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Claim the Deduction

If the charity sells your car and you claim a deduction of more than $500, you can deduct the lesser of (1) the gross proceeds of the sale (as indicated on Form 1098-C), or (2) the car's FMV on the date of your contribution. However, if the charity doesn't sell the car, but instead elects to (1) make a significant intervening use of it or materially improve it prior to its transfer, or (2) give away the car or sell it at a price well below its FMV to a needy individual in furtherance of its charitable purpose, you can generally deduct the car's FMV at the time of your contribution. In this instance, Form 1098-C should indicate which of the two exceptions applies.

You can take a deduction only for the year in which you transfer the car to the charity, even if the charity doesn't sell the car until a later year. However, you can't take a deduction of more than $500 until you've received Form 1098-C to attach to your return. Thus, if you receive Form 1098-C after you file your return for the year of the donation, you may then file an amended return for that year, claim the deduction on the amended return, and attach Form 1098-C to the amended return. For deductions of greater than $500 but not more than $5,000, you must also complete Section A of Form 8283, Noncash Charitable Deductions, and attach it to your tax return.

If your deduction is for an amount greater than $5,000, you must complete Section B of Form 8283, have it signed by an authorized official of the charity, and attach it to your return. In this instance, if your deduction is not limited to the gross proceeds of the sale of your car (i.e., one of the two allowable exceptions noted above applies), the appraiser must also complete and sign Section B of Form 8283, and you must also attach the appraisal to your return.

If the charity sells your donated car for $500 or less, you can deduct the lesser of $500 or the FMV of your car on the date of your contribution. However, if one of the exceptions noted above applies, you may generally deduct teh FMV of your car.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

*Featured photo credit to State Farm: https://www.flickr.com/photos/statefarm/7979444605

Charitable Giving

Charitable giving can play an important role in many estate plans. Philanthropy cannot only give you great personal satisfaction, it can also give you a current income tax deduction, let you avoid capital gains tax, and reduce the amount of taxes your estate may owe when you die. 

There are many ways to give to charity. You can make gifts during your lifetime or at your death. You can make gifts outright or use a trust. You can name a charity as a beneficiary in your will, or designate a charity as a beneficiary of your retirement plan or life insurance policy. Or, if your gift is substantial, you can establish a private foundation, community foundation, or donor-advised fund.


Making Outright Gifts
An outright gift is one that benefits the charity immediately and exclusively. With an outright gift you get an immediate income and gift tax deduction. Tip: Make sure the charity is a qualified charity according to the IRS. Get a written receipt or keep a bank record for any cash donations, and get a written receipt for any property other than money.


Will or trust bequests and beneficiary
designations

These gifts are made by including a provision in your will or trust document, or by using a beneficiary designation form. The charity receives the gift at your death, at which time your estate can take the income and estate tax deductions.

Charitable Trusts
Another way for you to make charitable gifts is to create a charitable trust. You can name the charity as the sole beneficiary, or you can name a non-charitable beneficiary as well, splitting the beneficial interest (this is referred to as making a partial charitable gift). The most common types of trusts used to make partial gifts to charity are the charitable lead trust and the charitable remainder trust.

Charitable Lead Trust
A charitable lead trust pays income to a charity for a certain period of years, and then the trust principal passes back to you, your family members, or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest. A charitable lead trust can be an excellent estate planning vehicle if you own assets that you expect will substantially appreciate in value. If created properly, a charitable lead trust allows you to keep an asset in the family and still enjoy some tax benefits.

How Charitable Lead Trust Works

Example: John, who often donates to charity, creates and funds a $2 million charitable lead trust. The trust provides for fixed annual payments of $100,000 (or 5% of the initial $2 million value) to ABC Charity for 20 years. At the end of the 20-year period, the entire trust principal will go outright to John's children. Using IRS tables and assuming a 2.0% Section 7520 rate, the charity's lead interest is valued at $1,635,140, and the remainder interest is valued at $364,860. Assuming the trust assets appreciate in value, John's children will receive any amount in excess of the remainder interest ($364,860) unreduced by estate taxes.

Charitable Remainder Trust

A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to you, your family members, or other heirs for a period of years, then the principal goes to your favorite charity. A charitable remainder trust can be beneficial because it provides you with a stream of current income--a desirable feature if there won't be enough income from other sources.

How a Charitable Remainder Trust Works

Example: Jane, an 80-year-old widow, creates and funds a charitable remainder trust with real estate currently valued at $1 million, and with a cost basis of $250,000. The trust provides that fixed quarterly payments be paid to her for 20 years. At the end of that period, the entire trust principal will go outright to her husband's alma mater. Using IRS tables and assuming a 2.0% Section 7520 rate, Jane receives $50,000 each year, avoids capital gains tax on $750,000, and receives an immediate income tax charitable deduction of $176,298, which can be carried forward for five years. Further, Jane has removed $1 million, plus any future appreciation, from her gross estate.

Private Family Foundation

A private family foundation is a separate legal entity that can endure for many generations after your death. You create the foundation, then transfer assets to the foundation, which in turn makes grants to public charities. You and your descendants have complete control over which charities receive grants. But, unless you can contribute enough capital to generate funds for grants, the costs and complexities of a private foundation may not be worth it. Tip: One rule of thumb is that you should be able to donate enough assets to generate at least $25,000 a year for grants.

Community Foundation

If you want your dollars to be spent on improving the quality of life in a particular community, consider giving to a community foundation. Similar to a private foundation, a community foundation accepts donations from many sources, and is overseen by individuals familiar with the community's particular needs, and professionals skilled at running a charitable organization.

Donor-Advised Fund

Similar in some respects to a private foundation, a donor-advised fund offers an easier way for you to make a significant gift to charity over a long period of time. A donor-advised fund actually refers to an account that is held within a charitable organization. The charitable organization is a separate legal entity, but your account is not--it is merely a component of the charitable organization that holds the account. Once you transfer assets to the account, the charitable organization becomes the legal owner of the assets and has ultimate control over them. You can only advise--not direct--the charitable organization on how your contributions will be distributed to other charities.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

Are Alternative Investments Right For Your Portfolio?

In recent years it would be difficult to read any financial newspaper or website without seeing headlines about “alternative investments”. This term is rarely defined by media accounts but seems to encompass hedge funds, private equity, infrastructure investments, as well as real estate.

While a common definition of alternative investments continues to prove elusive it’s probably fair to say that alternative investments tend to be less regulated, less liquid, and less transparent than most stock and bond funds available to individual investors.

Private equity? Hedge funds? Sounds risky…

While these can be risky options the reality is they encompass a variety of investment strategies and risk tolerance levels.

There are private equity firms engaged in buying and turning around relatively conservative businesses, such as manufacturing consumer staples or operating refineries. Others take extraordinary risks in their pursuit of returns, like the venture capital firms in Silicon Valley.

The same holds true in the world of hedge funds; some operate balanced strategies that seek to preserve capital and earn a modest return above inflation, while others make leveraged bets on speculative stocks or in commodities markets.

Infrastructure and real estate tends to be a much less glamorous part of the alternative investment landscape, as investing in large projects like toll-roads and office buildings tends to generate slow but steady returns over years or even decades.

What are the benefits of these alternative strategies for investors?

There are a variety of potential benefits, but those most frequently cited include additional diversification, returns that aren’t necessarily connected to the health of the overall stock or bond market, and outsized returns that come from risking capital over large periods of time.

In truth there are almost countless alternative investment strategies being applied in the marketplace today, and simply conducting research and due-diligence on all of them to determine their risk and reward characteristics has become a new line of business for many full-time research professionals. 

How can I evaluate whether these make sense for me?

The recent rise of alternative investments in mutual funds available to the public has fueled interest in this area of the market previously only available to large institutional investors or high net worth individuals. Unfortunately this newfound ease of access doesn’t make these investments any less risky.

Consider a short checklist for including or excluding alternative investments as part of your portfolio:

  • Am I investing for a long time horizon?
  • Does my portfolio need additional diversification beyond typical stock and bond asset classes?
  • Is there a chance I will need to access this money in the near term?
  • Is my risk tolerance sufficient for these opaque and lightly regulated investments?
  • Do I have a trusted professional helping me find the right investment options?

While there is no hard and fast rule as to how many of the above need to be a “yes” for alternative investments to fit your circumstance it is certainly fair to say these are not for the DIY investor. While hedge fund returns and private equity corporate buyouts often make headlines, the same is true for the frauds and spectacular crashes in this growing corner of the market. Before making a decision about alternative investments talk to your financial planner about what investing strategies can help you meet your goals for your financial journey while still prudently managing the investment risks along the way.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.