Charitable giving is a way for businesses and individuals to save on taxes while supporting the causes that align with their values. At Schwabe, we can help clients to plan charitable gifts and make sure that their charitable giving works holistically with the plan they have created for the distribution of their entire estate. This article will cover common questions associated with charitable giving.
What are the benefits of charitable giving?
Giving is a way to support community, make an impact, or leave a legacy. Charitable giving can also have tax or legal upsides.
Tax deductions are one reason individuals and businesses make donations. Congress encourages charitable giving by providing tax deductions for charitable contributions. These often come in two varieties:
Income tax deductions: These can be taken on an income tax return to offset earned income. Generally, donors who take the standard deduction do not get to deduct charitable gifts. However, donors who itemize their income tax deductions can deduct charitable contributions from income taxes within certain limits that are based upon a percentage of the donor’s adjusted gross income (“AGI”).
Estate tax deductions: These can be taken on an estate tax return to minimize any estate taxes due.
Which charity should I give to?
There are a few considerations to make when determining which charity to donate to:
Tax deduction: In order to achieve tax advantages, the charity must be a tax-exempt entity. Check to see if the charity has a 501(c)(3) tax-exempt status. The IRS has a Tax-Exempt Entities list that the IRS has said donors can conclusively rely upon. Check this before making a gift to a charity if deductibility is a concern.
Other considerations: Will the charity use funds in a manner agreeable to the donor? What kind of programs does the charity offer? Is the charity reputable?
Donor advised funds (“DAFs”) are an alternative if the donor has specific interests (education, food insecurity, environmental protection) but is not certain about a specific charity.
How much is the right amount to give?
The amount is largely up to the donor; however, there are a few considerations:
Capacity to gift: Gifts are irrevocable, and it’s important to avoid undermining other monetary goals, including long-term spending needs and transferring wealth to family.
Gift matching: Is there a certain amount to qualify for a gift match?
Frequency: Does one large gift or several annual ongoing donations make sense for the donor?
If a tax deduction is a motivating factor, donors may want to consider income tax deductibility limits. For standard deduction takers, donations up to $300 (for single taxpayers) and $600 (for married taxpayers filing jointly) are deductible. This deduction applies only to qualified cash contributions to public charities. This does not apply to cash contributions made to private foundations, donor advised funds or supporting organizations, or to split interest trusts like charitable remainder and lead trusts.
For taxpayers who itemize deductions, cash contributions to public charities and certain private foundations are deductible up to 100% of AGI for 2021 under the Consolidated Appropriations Act.
If an individual wishes to make a contribution directly from their IRA, they may donate up to $100,000 and avoid paying income taxes on the distribution, known as a qualified charitable distribution.
Which assets can, or should, I donate?
Different asset types carry different tax impacts. Donors also need to consider how a charity’s gift acceptance policy may come into play—and whether or not that charity can accept certain types of gifts.
Tax advantaged assets: Appreciated assets owned for more than one year can be advantageous from a tax standpoint to donate because the donor avoids paying capital gains taxes and receives an income tax deduction based on the asset’s full fair market value (“FMV”), including gains.
Property that has decreased in value: Tax deductions of charitable donations are limited to the asset’s FMV. Therefore, it is not necessarily advantageous to donate assets that have decreased in value because taxpayers can’t claim a deduction for the difference between the property’s basis and its FMV.
Simplicity vs. complexity: Some assets, such as cash and securities, are easier to donate than assets like real estate, art, and tangible property because of a charity’s gift acceptance policy or the requirements to obtain appraisals of some assets.
When is the best time to give?
Another consideration for those thinking about charitable giving is whether to make charitable gifts during life versus making a bequest from an estate upon the donor’s death.
Lifetime gifts: An advantage of making lifetime gifts is that the donor gets to see the gift in action and the impact of their generosity on the community. The donor may also benefit from certain tax benefits, which include:
- Taking an income tax deduction on the year of the gift; and
- Gifting assets out of estate, thus reducing the size of the estate and minimizing or eliminating estate taxes.
Bequest from estate at death: Benefits include leaving a legacy, and the potential financial security of retaining assets. Making a bequest at death allows a deduction for estate tax purposes.
These are just some of the questions and considerations when determining to utilize charitable giving. To learn more about your options when it comes to trust and estate planning, we encourage you to consult your Schwabe attorney today.
This article summarizes aspects of the law; it does not constitute legal advice. For legal advice for your situation, you should contact an attorney.