Charitable giving is not just about making a difference; it can also offer significant tax benefits. As the landscape of philanthropy continues to evolve, understanding how to leverage your donations can enhance both your impact and financial strategy.
What Qualifies as a Deductible Contribution?
To be deductible, your charitable contribution must be made to a qualified organization as outlined by the IRS. Generally, you may deduct contributions up to 50% of your adjusted gross income (AGI), although certain organizations have different limits, such as 20% or 30% of AGI. Qualified organizations include:
- Public charities, educational institutions, and religious organizations.
- Certain private foundations and veterans’ organizations.
- Domestic fraternal societies if the contributions are used for charitable purposes.
It’s important to note that contributions of cash or property (like appreciated assets) must be made before the end of your tax year to qualify for a deduction. Cash contributions are typically limited to a percentage of your AGI, generally 60%, but for qualified contributions, you may be able to deduct up to 100% of your AGI. Contributions that exceed these limits can often be carried over to future tax years.
Here are several effective tax-smart approaches to consider when making charitable contributions.
1. Gift Appreciated Assets
Rather than donating cash, consider gifting appreciated assets, such as stocks or real estate. This strategy allows you to avoid capital gains taxes on the appreciation and claim a deduction based on the asset’s fair market value. For example, if you have stocks worth $50,000 that you purchased for $20,000, donating them directly can save you a substantial amount in taxes while enabling the charity to benefit from the full value of your gift.
2. Utilize a Donor-Advised Fund (DAF)
DAFs are an excellent way to maximize your giving while benefiting from immediate tax deductions. By contributing cash or non-cash assets to a DAF, you can deduct the full amount in the year of the contribution, even if you choose to distribute the funds to charities over time. This strategy allows you to bunch donations into one year, potentially exceeding the standard deduction limits and maximizing your tax savings.
3. Bunch Contributions
If you usually give annually, consider bunching your contributions into one year. By donating multiple years’ worth of gifts in a single tax year, you can itemize deductions that exceed the standard deduction. For instance, if you typically donate $10,000 a year, donating $30,000 in one year can provide significant tax benefits, allowing you to take the standard deduction in subsequent years.
4. Make Use of Qualified Charitable Distributions (QCDs)
For individuals aged 70½ and older, QCDs allow you to donate up to $100,000 directly from your IRA to a qualifying charity. The distribution is excluded from your taxable income, which can help lower your overall tax liability. This strategy is particularly beneficial for meeting required minimum distributions (RMDs) while supporting your favorite causes.
5. Consider Charitable Remainder Trusts (CRTs)
A CRT can be a powerful tool for both philanthropy and tax strategy. When you place assets into a CRT, you receive a charitable deduction based on the present value of the future gift to the charity. You and your beneficiaries can receive income from the trust for a specified period, after which the remaining assets go to the charity. This setup allows for tax savings while providing a steady income stream.
6. Claim Deductions for Charitable Business Expenses
If you incur expenses while volunteering for a charity or participating in fundraising activities, you may be eligible for tax deductions on those costs. These could include mileage, supplies, or other out-of-pocket expenses directly related to your charitable efforts. Keep detailed records to substantiate these deductions when filing your taxes.
7. Offset Capital Gains with Charitable Contributions
If you anticipate realizing capital gains from selling assets, consider making a charitable donation before the sale. This can offset the taxes owed on the gains, effectively lowering your tax bill. For example, if you sell appreciated stock, donating a portion of the proceeds can help mitigate the capital gains tax impact.
8. Name a Charity as a Beneficiary
Designating a charity as the beneficiary of your retirement accounts, such as an IRA, can have significant tax advantages. Charities do not pay income tax on the distributions they receive, which means your entire legacy can support charitable causes without tax erosion.
9. Explore Charitable Lead Trusts (CLTs)
A CLT allows you to provide a stream of income to a charity for a specified term, after which the remaining assets are distributed to your heirs. This strategy can provide significant tax benefits, including a charitable deduction and potential estate tax savings.
Conclusion
Incorporating these tax-smart strategies into your charitable giving can amplify your contributions while maximizing your tax benefits. Contact L.V. Browne, CPA today to let us help you tailor your giving strategy to your unique financial situation and philanthropic goals.
