Charitable giving is a way for businesses and individuals to support the causes that align with their values while saving on taxes. This article will cover common questions associated with charitable giving that will hopefully inspire charitable giving.
What are the benefits of charitable giving?
Giving is a way to support community, make an impact, or leave a legacy. Charitable giving can also have tax or legal upsides.
Tax deductions are one reason individuals and businesses make donations. Congress encourages charitable giving by providing tax deductions for charitable contributions. These typically come in two varieties: income tax deductions and estate tax deductions.
Income tax deductions: These can be taken on an income tax return to offset earned income. Generally, donors who take the standard deduction do not get to deduct charitable gifts. However, donors who itemize their income tax deductions may deduct charitable contributions from income taxes within certain limits that are based upon a percentage of the donor’s adjusted gross income (“AGI”).
Estate tax deductions: These can be taken on an estate tax return to minimize any estate taxes due after the death of an individual, provided that person has left assets in the estate to charity at time of death through a will or estate plan.
Which charity should I give to?
Several considerations might determine which charity to donate to:
Tax deduction: In order to achieve tax advantages, the charity must have 501(c)(3) tax-exempt status. The IRS has a Tax-Exempt Entities list that donors may rely upon. Check this before making a gift to a charity if deductibility is a concern.
Other considerations: Will the charity use funds in a manner agreeable to the donor? What kind of programs does the charity offer? Donor advised funds (“DAFs”) are an alternative if the donor has specific interests (education, food insecurity, environmental protection) but has not identified a specific charity.
How much is the right amount to give?
The amount is largely up to the donor. Here are a few considerations:
Capacity to gift: Gifts are irrevocable, and it’s important to avoid undermining other monetary goals, such as long-term spending needs and the transfer of wealth to family.
Frequency: Does one large gift or several annual ongoing donations make more sense?
If a tax deduction is a motivating factor, donors may want to work with their tax professionals to confirm whether income tax deductibility limits apply to them.
Qualified charitable distributions: If an individual wishes to make a contribution directly from their IRA, they may donate up to $100,000 and avoid paying income taxes on the distribution, known as a qualified charitable distribution.
Gift matching: Is a certain amount required to qualify for a gift match? Sometimes donors can be motivated to meet a gift–matching program to maximize their gift.
Which assets can, or should, I donate?
Different asset types entail different tax impacts. Donors also should consider how a charity’s gift acceptance policy may come into play—and whether the charity can accept certain types of gifts.
Tax advantaged assets: From a tax standpoint, appreciated assets owned for more than one year can be advantageous for donation because the donor avoids paying capital gains taxes and receives an income tax deduction based on the asset’s full fair market value, including gains.
Property that has decreased in value: Tax deductions of charitable donations are limited to the asset’s fair market value. Therefore, it is not necessarily advantageous to donate assets that have decreased in value because taxpayers cannot claim a deduction for the difference between the property’s basis and its fair market value.
Simplicity vs. complexity: Some assets, such as cash and securities, are easier to donate than assets like real estate, art, and tangible property, because of a charity’s gift acceptance policy or the requirements to obtain appraisals of some assets.
When is the best time to give?
Another consideration for anyone thinking about charitable giving is whether to make charitable gifts during life versus designating a bequest from an estate after the donor has passed away.
Lifetime gifts: An advantage of making lifetime gifts is that the donor gets to see the gift in action and the impact of their generosity on the community. The donor may also benefit from certain tax benefits, which include a potential income tax deduction in the year of the gift, and gifting assets out of estate, thus reducing the size of the estate and minimizing or eliminating future estate taxes.
Bequest from estate at death: Benefits include leaving a legacy, and the potential financial security of retaining assets. As noted above, making a bequest at death allows a deduction for estate tax purposes.
This article does not present an exhaustive list of the questions and considerations to be reviewed when deciding whether to utilize charitable giving. This article summarizes aspects of the law; it does not constitute legal advice. For legal advice for your situation, you should contact an attorney or tax professional.