Charitable giving can allow you to contribute to certain causes or charities you support while reducing your tax bill. It can be one of the largest deductions you can claim on your taxes depending on how much you give. Different strategies can maximize your gifts and your tax advantages.
What Is Charitable Giving?
Broadly speaking, charitable giving includes gifting your money, time, talent or goods to a person in need, a worthy cause or through a charitable organization or trust.
The IRS has a more narrow legal definition of charitable giving for tax purposes.
“A charitable contribution is a donation or gift to, or for the use of, a qualified organization. It is voluntary and is made without getting, or expecting to get, anything of equal value.”
For tax purposes, charitable giving can only be made to organizations that qualify under IRS requirements for a charitable organization. The IRS allows you to deduct from your taxes a portion of money you donate to a qualifying organization.
Qualifying organizations must serve a purpose of promoting charity, education, literature, religion, science or some similar public good under IRS rules.
- Real estate
- Other items of monetary value
To claim a deduction, you will have to show the market value of the contributed goods on your tax returns if the value exceeds $500. You must also show a receipt for any contribution you make in cash or in kind that exceeds $250, and a written appraisal is also required for non-cash contributions of over $5,000.
The IRS does not allow you to claim the market value of your time spent in volunteer activities. However, you can deduct your mileage for travel to and from volunteer activities for a qualified organization at a rate determined by the IRS, which is $0.14/mile for 2022.
Tax Advantages of Charitable Giving
Donating money or property to a qualified charitable organization can give you tax deductions that lower your tax bill. But it may not be a dollar-for-dollar savings.
The total amount you deduct from your taxes for donations is typically limited to no more than 60 percent of your adjusted gross income (AGI). It may be limited to even smaller percentages of your AGI depending on the type of property you give and the type of organization you give it to.
You can only deduct charitable contributions — of money or property — if you make them to a qualified charitable organization.
|DEDUCTIBLE IF CONTRIBUTED TO:||NOT DEDUCTIBLE IF CONTRIBUTED TO:|
|Churches, synagogues, mosques, temples or other religious organizations||Civic leagues, social or sports clubs, chambers of commerce or labor unions|
|Federal, state and local governments if given for a public purpose such as reducing the public debt or maintaining a public park||Foreign organizations (but there are exceptions for certain Canadian, Israeli and Mexican charities|
|Nonprofit schools and hospitals||Groups run for personal profit|
|Certain qualified nonprofit organizations including, but not limited to, the American Red Cross, United Way, Salvation Army, Goodwill, CARE, Boy Scouts, Girl Scouts and other organizations||Lobbyist groups or organizations|
|War veterans groups||Homeowners associations, club dues or fees, gifts to individuals, contributions to political organizations or candidates|
|Paying for expenses of a student living with you who is sponsored by a qualified organization||School tuition (though you may be able to claim certain tax credits)|
|Out-of-pocket expenses you incur while volunteering for a qualified organization||Value of your time or services|
How to Maximize Your Charitable Giving Impact
There are several strategies you can use to maximize your giving impact while minimizing your tax liability.
These include funds you can establish or wealth management strategies to take advantage of tax laws that reward charitable giving. You can take advantage of many of these strategies on a yearly basis — and set some in motion to continue a giving legacy after your death.
Charitable Remainder Trusts
A charitable remainder trust (CRT) allows you to keep giving after you’ve passed away. A CRT is an irrevocable trust that lets you turn highly appreciated assets into a continuing stream of income.
The CRT gives you several tax advantages — a deduction on the asset’s transfer to the CRT, a potential break on future estate taxes and avoiding capital gains tax.
Once you — or your chosen heirs — pass on, or the income stream ends, then the assets go to the qualified charity you chose.
Charitable Lead Trusts
A charitable lead trust (CLT) is the mirror image of a CRT. Setting up a CLT pays a guaranteed income to the qualified charity you choose for a specific period. When the time runs out, the assets go to the heirs you name.
You get a tax deduction for the income stream’s value when you create the CLT while reducing estate and gift tax liabilities.
Increase Charitable Giving in High Income Years
If you have a particularly higher than normal income in a particular year — from a bonus or other windfall — you can combine several years of annual contributions.
By grouping donations into one large sum, you can itemize your deductions and it may reduce your overall tax burden.
A donor-advised fund is another way to donate to charity while cutting your tax liability in a high-income year.
You can donate cash — or highly appreciated assets — into the fund and get a tax deduction for that year. You can continue contributing to the fund year after year and distribute money from the fund to whatever qualified charities you choose.
Each time you hit a high-income year, you can repeat a large contribution and keep funding donations while taking tax deductions.
Avoid Capital Gains Taxes While Giving to a Favorite Cause
There may be advantages with donating stock to charity, too.
If you have stocks, bonds, real estate or other assets that have appreciated in value over time, you can avoid a capital gains tax by donating the assets to a qualified charity.
You can take an income tax deduction for the fair market asset on your taxes. This strategy also works to minimize the impact of the estate tax on your heirs.
Donate Your Retirement Plan to Charity
You can turn your retirement plan into a legacy by leaving it to charity and potentially save your heirs some money on their taxes, too.
If your heirs withdraw money from the plan, they’ll have to pay income taxes — maybe even estate taxes if you leave behind a large enough estate. A qualified charity doesn’t have to pay taxes and your retirement plan will continue working for a cause you support.
Roll Donations Over to Charity
If you don’t need the RMD, you can apply it toward a charitable rollover. You can roll over up to $100,000 a year to a qualified charity, reducing your taxable income in the process.
What Are the Best Charities to Donate To?
The best charities to donate to are the ones that address the causes you care most about. But you should compare various charities that support the same or similar causes to make sure your donations get the most bang for your donated bucks.
Charitable organizations still have operating costs and that may limit how much of their contributions go toward their causes — and how much goes toward keeping the lights on.
|ORGANIZATION||TOTAL INDIVIDUAL DONATIONS||TOTAL ANNUAL REVENUE||CHARITABLE COMMITMENT|
|United Way||$3.6 billion||$4.1 billion||85%|
|Feeding America||$2.8 billion||$2.8 billion||99%|
|Direct Relief||$2 billion||$2 billion||100%|
|Salvation Army||$2 billion||$3.3 billion||82%|
|St. Jude Children’s Research Hospital||$1.8 billion||$2.2 billion||70%|
You should research the qualified charitable organization you plan to contribute to. Make sure it aligns with your values and see how it compares to the job other similar organizations provide.
There are several organizations known as charity watchdogs that track and analyze charitable organizations on a variety of strengths and weaknesses. These organizations can help you with some background information.
- CharityWatch gives letter grade rankings to leading charitable organizations in different categories. It focuses on organizations that spend $25 or less to raise each $100 in public support, don’t hold large amounts of their assets in reserve, meet CharityWatch’s standards and disclose basic financial information for CharityWatch’s researchers.
- Charity Navigator
- Charity Navigator rates more than 195,000 charities based on the organization’s financial health and its accountability and transparency. Ratings range from zero to four stars — with four stars being the best. There’s also a “Donor Advisory” rating for organizations that raise “serious concerns” that prevent any rating — not even a zero.
- Give.org is the website of the Better Business Bureau’s Wise Giving Alliance. It provides user reviews of charitable organizations. These are similar to Yelp or TripAdvisor reviews — where people may air grievances — so understand that you may have to take some of these with a grain of salt.
You can budget annual charitable giving into your personal finance strategy. Discussing this with your tax professional or financial advisor can help you calculate a “sweet spot” of annual giving where charitable contribution deductions lower your tax bill.
Year-End Guidelines for Contributing to Charities
Charitable giving tends to peak towards the end of the year — spurred by a combination of the holiday giving spirit and IRS deadlines for claiming a charitable deduction for the tax year.
Giving Tuesday — the first Tuesday after Thanksgiving — has also highlighted the year-end giving season in recent years.
This time is a good time to assess your charitable giving throughout the year and how it will affect your potential charitable tax deductions. You may want to consider increasing — or finishing — your charitable contribution budget around this time.
It’s a good time to talk with your tax advisor or the administrator of your charitable fund or trust to make sure you’re getting the best tax advantage from your charitable gifts. It’s also important to make sure that you are aware of office hours of your financial or tax professionals and transfer deadlines to make sure your contributions are counted before the tax year ends.
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- First Commonwealth Bank. (2021, November 22). Double Your Charitable Giving up to $100,000. Retrieved from https://abc6onyourside.com/sponsored/spotlight/first-commonwealth-bank-double-your-charitable-giving-up-to-one-hundred-thousand-dollars
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