Maximizing the Tax Benefits of Philanthropy and Charitable Giving

Melissa A. Seamon, CFP®   

Senior Financial Advisor  

We are nation of givers, as evidenced by the record increases in charitable donations despite the increase in the standard deduction seven years ago. For those with philanthropic desires, giving money and time to charitable organizations can enhance their well-being. 

Thanks to the U.S. Tax Code's significant tax benefits, philanthropy, and charitable giving can also enhance your financial well-being. To optimize your tax savings, it's essential to understand the tax rules, strategies, and timing of donations.

Understanding Tax-Deductible Contributions

Your contributions must be made to a qualified charitable organization to qualify for a tax deduction. These organizations typically fall under the IRS's 501(c)(3) category, including public charities, religious organizations, and private foundations. Always verify the status of the organization to ensure your donation is tax-deductible.

Strategies for Maximizing Deductions

You must itemize your deductions on your tax return to deduct charitable contributions. The standard deduction is often higher, especially after the 2017 Tax Cuts and Jobs Act, making itemizing beneficial only when your total deductions exceed the standard deduction. Review your annual expenses to determine if itemizing is advantageous . 

Bunching Contributions

If your charitable donations are not enough to exceed the standard deduction threshold in any given year, you can bunch several years' worth of donations into a single year. For example, instead of donating $5,000 annually, donate $20,000 every four years. This approach allows you to itemize in the year of the larger donation and claim the standard deduction in other years. 

Timing and Types of Donations

Donating Appreciated Assets

Donating appreciated assets like stocks, bonds, or real estate can offer a double tax benefit. First, you avoid paying capital gains tax on the appreciation. Second, you can deduct the fair market value of the asset. You must ensure the assets have been held for over one year to qualify for this benefit.

Donor-Advised Funds (DAFs)

Donor-Advised Funds (DAFs) offer a flexible and tax-effective way to manage your charitable giving. You contribute cash or assets to a DAF you set up, receive an immediate tax deduction, and then recommend grants to qualified charities over time. This strategy is useful for bunching contributions and maximizing your charitable impact without having to commit to specific charities immediately.

Qualified Charitable Distributions (QCDs)

Individuals aged 70½ or older can make Qualified Charitable Distributions (QCDs) directly from their IRAs, up to $100,000 annually. These distributions count towards your required minimum distribution (RMD) and are excluded from taxable income, offering a significant tax advantage.

Special Considerations for High-Income Donors

Charitable Remainder Trusts (CRTs)

Charitable Remainder Trusts (CRTs) provide income to the donor or other beneficiaries for a specified period, after which the remaining assets go to charity. This trust offers an immediate partial tax deduction based on the present value of the remainder interest that will eventually go to charity, and it helps defer capital gains taxes on appreciated assets.

Charitable Lead Trusts (CLTs) 

Charitable Lead Trusts (CLTs) are the inverse of CRTs. They provide income to a charity for a specified period, with the remaining assets eventually returning to the donor or their beneficiaries. This structure can reduce estate and gift taxes on appreciated assets passed to heirs.

Private Foundations

For those with substantial wealth, establishing a private foundation can be beneficial. Private foundations offer control over the donation process and provide immediate tax deductions. However, they come with stricter regulatory requirements and administrative costs compared to other giving vehicles.

Maximizing Deductions with Proper Documentation

Accurate record-keeping is essential to substantiate your charitable contributions and avoid issues with the IRS. For cash donations under $250, a bank record or receipt from the charity is sufficient. For contributions of $250 or more, you must obtain a written acknowledgment from the charity. Non-cash donations over $500 require a completed IRS Form 8283, and those exceeding $5,000 must be appraised and documented.

Deduction Limits and Carryovers

The IRS limits the amount of charitable contributions that can be deducted in a given year. For cash contributions, the limit is generally 60% of your adjusted gross income (AGI). For donations of appreciated assets, the limit is 30% of AGI. Deductions for contributions exceeding these limits can be carried over for up to five subsequent tax years.

Strategic Use of Matching Gifts

Many employers offer matching gift programs, which can double or even triple the impact of your donation. Take advantage of these programs to increase your total contribution to the charity without additional cost, potentially enhancing your deduction if the matched amount also qualifies.

Conclusion

Maximizing the tax benefits of philanthropy and charitable giving requires strategic planning, proper documentation, and an understanding of the various vehicles and rules governing charitable contributions. Remember, philanthropy is about creating positive change, and tax deductions are a tool to enhance your giving power.

Always consult a tax professional to tailor these strategies to your financial situation and ensure compliance with current tax laws.

At Gardey Financial Advisors, we work with individuals, families, and business owners who are both charitably inclined and in need of tax-savings due to the complexity of their wealth. We find ways to maximize our client's resources and to minimize their tax burden whenever possible. If this interests you, we can help. We aim to maintain your financial health by developing personalized strategies centered on your best interest, along with providing exceptional client service. Working with those in our local community of Saginaw and throughout the country, we strive to be your lifelong financial partner, confidant, and guide as we pursue your goals—together. Schedule your complimentary introduction meeting today.

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