There are many ways to give to charitable causes without risk of IRS wrath. We agree that there is a lot of value in making contributions to charities partly with dollars that would be paid in income taxes, but each person has to recognize that you must simultaneously give away non-tax money. For example, a gift of $1M can in some cases reduce your taxes by about $400K (or 40% of the donated dollars) BUT you must accept that the other $600k will be funded from your savings (non-tax dollars).
The tools used to make charitable contributions can be simple direct donations to a charity or to many using Donor Advised Funds (DAF), or a specific group using a charitable trust or use of Family Private Foundations. The type of contributions can be cash, stock, shares in a company, or any asset. What is important is that the charitable deduction follow IRS proven process to the letter. This will prevent negative consequences of having to pay taxes and tax penalties years later.
This month, we have a case (Braen, et. al v. Commissioner of Internal Revenue, TC) that disallowed a $5.22 million charitable income tax deduction claimed by the Braen family in connection with a sale of a property in NY made through S Corp shares. The rejection appears to be based on not adhering to standard timing/practices and on property valuation misstatements. Unless they appeal, the family will have no deduction and must pay substantial penalties to the IRS.
What does this mean for you? There is nothing risky about using known and established ways to reduce your tax liability and particularly advantageous if you can also use it to fulfill your philanthropic plan, but this must be implemented using proven processes. Let us know if you are ready to create your philanthropic financial plan.
Edi Alvarez, CFP®
BS, BEd, MS