Many people choose to support organizations and causes they feel strongly about by making donations through various types of charitable giving. Of course, philanthropy on its own is a wonderful thing. However, you can also enjoy tax benefits for this generosity.
Charitable giving can in fact be a significant part of financial, tax, and estate planning. It’s not a straightforward process, though, and the rules can be fairly complex. That’s why it’s essential that you consult with your tax advisor or financial advisor to understand exactly what you need to do and how it affects you.
This includes considerations such as knowing when you need receipts, supporting documentation from your bank, an independent appraisal of the value of property gifts or assets, and more.
Also, keep in mind that if your standard deduction is higher than your itemized deductions, you probably won’t be claiming itemized deductions. The different types of charitable giving are generally claimed as itemized deductions. This certainly isn’t intended to dissuade anyone from partaking in philanthropic giving, which is still important and rewarding; however, there will not be tax benefits.
Different Types of Charitable Giving
- Cash – Giving cash is the most straightforward way to donate. Typically, your deduction equals the amount of your gift, subtracting the value of any goods or services you get in return. Always request a receipt for your contribution when giving in cash, no matter the amount; alternatively, be prepared to show supporting financial documentation like a bank statement or canceled check.
- Donor Advised Funds – This involves gifting cash or securities to a nonprofit organization through a giving account. You’re allowed to make recommendations as to how your money is allocated, though the recipient is not legally obligated to oblige (which is why it’s called “donor advised” and not “donor directed”). You receive the maximum tax benefit, and can arrange for the account to continue paying out after your death.
- Real Estate – Selling property can come with a significant tax liability. On the other hand, donating real estate you no longer need or want often comes with a sizable tax benefit. If you want to make a gift of your current home, you can arrange for the deed to be charitably transferred after your death. The value of the home is then deducted from your estate, lowering the estate tax.
- Securities – Donating appreciated securities like stocks offers some of the best relative tax benefit of all the types of charitable giving. That’s because you’re off the hook for any capital gains tax since you never sell the stock, plus any stocks more than one year old that have risen in cost qualify for deduction of their full fair market value (up to 30 percent of your adjusted gross income).
- Asset Donations – Tangible assets like art, jewelry, or vehicles may be donated and eligible for a deduction up to their value. Get an independent appraisal on gifts worth $5,000 or more. You usually qualify for a higher deduction when giving items related to the recipient’s mission (e.g., giving art to an art museum versus a cancer foundation). You can also give assets like life insurance policies or retirement accounts for an income tax deduction and to avoid the tax liability of tax-deferred accounts. On top of that, it can also lower your estate tax.
- Charitable Trusts – A Charitable Lead Trust (CLT) involves paying out donations to an organization annually for a set period from a trust you’ve established. Your tax deduction is based on the income stream you create for the charity. If there’s money left over, it can be held in the trust or given to another recipient. A Charitable Remainder Trust (CRT) is similar, but the beneficiaries and donor are paid before the charity receives its income. Note that charitable trusts do require ongoing administrative management, which means annual fees.
- Pooled Income Fund – This is worth considering if you’re trying to generate income and would like to donate a small part of it later down the line. Securities and cash are pooled and paid out to you and any other contributing beneficiaries. Upon your death, the remaining funds are donated to a charity of your choosing. This can qualify for a tax deduction up to the amount of money the recipient will receive.
- Private Foundation – A private foundation is set up as a charitable trust or corporation. This is an excellent option for people with significant assets who are passionate about a cause and would like their family to remain involved with it after their death. It’s also a great way to establish a legacy. There are strict regulations in place, but this affords you full control over where your money goes. You have a number of options that you don’t get with other types of charitable giving too, such as grants for individuals, international grants, scholarships, direct charitable activities, and program investments.