- Charitable giving is a generous action that allows you to support the things and people you want to help. If done properly, it is also a way to reduce your tax liabilities.
- The IRS maintains strict guidelines on charitable giving. Before implementing a philanthropic program, make sure you understand them – ideally, with the help of a tax professional.
- Learning new strategies can help you maximize your charitable impact.
What Is Charitable Giving?
Charitable giving is a fundamentally selfless action. It involves donating something of value (money, financial securities, real assets, time or talent) directly to people in need or indirectly through an organization designed to serve certain interests.
Charitable giving can produce meaningful, emotional benefits. In addition, when done in accordance with Internal Revenue Service Guidelines (IRS), it can also yield significant tax advantages.
What Are the Tax Implications for Donations?
The IRS maintains a more strict definition of charitable giving than the one offered above. For tax purposes, charitable giving must be voluntary and without the expectation of receiving anything of equal value. Furthermore, it must be made to an IRS-qualified organization, which must serve the purpose of promoting charity, education, literature, religion, science or some similar public good under IRS rules.
Charitable Contributions You Can and Can’t Claim as Deductions
|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|
The types of deductible contributions allowed by the IRS include cash, cars, clothing, artwork, financial securities, real estate, jewelry and other items of monetary value. If you donate any of these assets to a qualified charitable organization, the IRS allows you to take tax deductions – subject to limits – against your income.
To claim a deduction, you will have to prove the market value of the contributed goods on your tax return – if the aggregate value exceeds $500. You must also show a receipt for any contribution you make in cash or in-kind that exceeds $250, and you must produce a written appraisal for non-cash contributions exceeding $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 per mile for 2023.
Tax Advantages of Charitable Giving
Donating money or property to a qualified charitable organization can yield various tax advantages, including current-year tax deductions (and carry-over deductions for future years), avoidance of capital gains taxes on highly appreciated assets and a potential break on future estate taxes. However, the tax savings may not be dollar-for-dollar compared to your contributions.
The total amount you can deduct from your taxes for donations is typically limited to 60% of your adjusted gross income (AGI). It may be limited to an even smaller percentage of your AGI, depending on the class of property you donate and the type of organization that receives it.
Tax Treatments of Your Donations
The tax treatment of a charitable contribution depends on three factors: the recipient (only donations to qualified charities are deductible), how the contribution is structured and the type of asset gifted. Generally, if a contribution is made to a qualified organization, the following rules-of-thumb hold true:
- Cash Donations
- Cash donations face no restrictions, beyond the previously stated AGI limit. However, make sure you maintain relevant receipts and/or bank records to substantiate gifts.
- Non-Cash Donations of Personal Property
- Non-cash donations of personal property such as clothing, household goods and vehicles are tax deductible. If the property does not relate to a charity’s mission, you may deduct the lessor of the amount you paid for the property or the property’s current reasonable value. If the property relates to a charity’s mission, it is usually fully deductible based on its current reasonable value.
- Non-Cash Donations of Income Property and Capital Property
- Non-cash donations of income property and capital property (business inventory, artwork, publicly traded financial securities, privately held investments and real estate) are subject to various IRS stipulations, depending on the type of asset, how long it has been held and whether it is in an appreciated or depreciated position. The guidelines in this space are complicated. As a result, Annuity.org recommends these types of assets be analyzed with a tax professional when you’re considering a donation.
7 Strategies To Maximize the Impact of Your Charitable Donations
There are several strategies you can use to maximize the impact of your charitable donations and minimize your tax liability. Some strategies call for taking advantage of tax-advantaged funds or trusts and making one-time contributions. Others involve maintaining an agile stance and modifying giving behavior each year as part of a holistic wealth management program.
- Increase Your Charitable Giving in High-Income Years
- Increasing your charitable giving in high-income years is one of the most straightforward strategies you can employ. If you receive an unusually large bonus, realize a large amount of capital gains or benefit from sizable lottery or gambling winnings in a particular year, the beneficial move is to simply pull forward several years of planned, annual charitable contributions to offset this income. This will reduce your tax liability for the current year and improve your finances over the long term.
- Donate Invested Assets to Charity
- Donating invested assets to charity is another simple way to reduce your tax burden. If you have stocks, bonds, real estate or other investments that have appreciated significantly, you can avoid capital gains tax by donating the assets to a qualified charity. This strategy can also minimize future estate taxes (in the event your estate is large enough to experience such taxes).
- Establish a Charitable Remainder Trust (CRT)
- Establishing a charitable remainder trust (CRT) is more complicated than the former strategies, but it can be highly rewarding. A CRT is an irrevocable trust that allows you to earn income on your donations while living. Once you or your named heirs pass on, the income stream ends, and the assets in the CRT are transferred to a qualified charity designated by you.
A CRT can provide several tax advantages, namely, deductions on asset transfers to the CRT, avoidance of capital gains tax on highly appreciated assets and a potential break on future estate taxes.
- Establish a Charitable Lead Trust (CLT)
- Establishing a charitable lead trust (CLT) is an alternative to a CRT. The two vehicles are similar, regarding implementation complexity and tax advantages. However, a CLT works in reverse relative to a CRT. Once established, a CLT pays a guaranteed income stream to a designated charity for a specified period. Then, at the end of the period, the assets in the trust go to your named heirs.
- Establish a Donor-Advised Fund
- Establishing a donor-advised fund is another way to optimize charitable contributions via an irrevocable trust. Essentially, a donor-advised fund is a feeder account that receives intermittent contributions, then invests them in a tax-free manner and grants them to handpicked charities on a timetable established by the donor. Generally, the most tax-efficient maneuver is to donate the largest amounts to the fund during your highest income years.
- Roll Donations Over to Charity
- Rolling over part of a traditional IRA to charity is a strategy for some retirees. It is especially popular for retirees who must take annual required minimum distributions (RMDs) and face the prospect of getting bumped into a higher tax bracket, but do not need the money. A charitable rollover allows them to strategically reduce their taxable income (by up to $100,000 per year) and gradually make their philanthropic endeavors a reality.
- Donate an Entire Retirement Plan
- Donating an entire retirement plan to charity at death is a final strategy to consider. This approach allows you to turn your retirement plan into a legacy that could last for a very long time, perhaps indefinitely, depending on the size of your plan. Naturally, this only makes sense if your heirs are financially stable and do not need the funds. Making this determination can be difficult to do, quantitatively and emotionally. As a result, it may be wise to consult with an independent financial advisor.
7 Prominent Strategies
Finding a Charity To Donate To
Giving to a charity is fundamentally an altruistic action that shows compassion for others. However, not all charities are created equal, and not all charities focus on the values, causes and people you are most inclined to support.
The best charities for you are the ones that work to address the issues you deeply care about. Once you identify those that support your philanthropic passions, compare them to pinpoint the ones that will get the most bang for your donated bucks. You want charities that transfer a very large portion of donations received to the causes and people they serve, rather than spending excessively on administrative costs.
For simplicity, you may want to donate to a single charity. However, if you have diverse philanthropic passions, you may want to donate to a handful of different charities. Neither approach is superior to the other; it’s all about what makes the most sense for you.
Five of the largest charitable organizations in the U.S. include United Way, Feeding America, Direct Relief, Salvation Army and St. Jude Children’s Research Hospital. However, size is not the most important aspect to consider when picking a charity. It’s more important to identify charities that align with your philanthropic passions and operate in a fiscally efficient manner.
Resources for Vetting Charitable Organizations
When it comes to identifying and vetting charities, you don’t have to do it alone. There are several donor-focused organizations that track and analyze charities based on a variety of attributes. These organizations, which are commonly referred to as charity watchdogs, can arm you with valuable background information and improve the quality of your philanthropic decisions.
- Charity Navigator
- Charity Navigator rates nearly 200,000 charities based on the following four multifaceted attributes: impact and results, accountability and financial health, leadership and adaptability, and culture and community. Ratings range from zero to four stars – with four stars being the best.
- The Better Business Bureau’s Wise Giving Alliance
- The Better Business Bureau’s Wise Giving Alliance provides charity reports, which help donors review charities and find trustworthy organizations to support. The Alliance also conducts charity assessments to help charities improve their practices and demonstrate trust.
- Charity Watch
- CharityWatch strives to maximize the effectiveness of every dollar contributed to charity by providing donors with the information they need to make more informed giving decisions. The watchdog focuses on organizations that spend $25 or less to raise each $100 in public support, do not hold large amounts of their assets in reserve and maintain a high degree of transparency.
- GlobalGiving is a nonprofit that supports other nonprofits by vetting them and connecting them to donors. Since 2002, it has helped trusted, community-led organizations in over 175 countries connect with donors to access the tools, training and support they need to make our world a better place.
Top Charity Watchdogs
Year-End Guidelines for Contributing to Charities
While it is smart to periodically monitor your charitable transactions throughout the year, it is critical to do so in early- to mid-Q4. This gives you some time to assess your fiscal position and determine whether it’s sensible and tax effective to make additional donations prior to December 31st – the IRS deadline for tax-deductible contributions each year.
Given the IRS deadline, charitable giving tends to peak towards the end of the year. The trend is also increased by the holiday giving spirit and the emergence of Giving Tuesday – the first Tuesday after Thanksgiving – which is celebrated to encourage global generosity.
Call To Action
Don’t let the end of the year pass you by in a flash. Strive to get a grasp on your charitable position by the end of November. This may involve consulting with your tax advisor and/or the administrators of your charitable funds and/or trusts to assess all tax reduction opportunities.
As part of the process, make sure you address the following:
- The actual deadline for tax-deductible contributions
- The effectiveness of new charities you want to support
- Opportunities to donate appreciated assets
- Maximizing strategies for charitable deductions
- The availability of employer-sponsored matching programs
- Options to implement recurring donations
Editor Malori Malone contributed to this article.