Charitable giving is one way you can support a specific cause or organization that is close to your heart. From a financial standpoint, charitable giving can be an important part of your estate, tax, and financial planning, too.
Depending on the type of your estate, the amount of money you want to give, and how you want to give it, you may find that you’re unsure of what type of charitable giving can work best for you and your philanthropic goals. There are several different ways you can give, each with its own pros and cons, depending on what you’re looking for.
A donor-advised fund (DAF) is a type of charitable giving where you donate a nonrefundable amount, either in cash or securities, to a nonprofit of your choice. Grants from donor-advised funds to charities totaled more than $34 billion in 2020.
One advantage to this type of giving is that you can direct the fund's administrator to send grants to the causes or organizations that you feel closest to. You also immediately receive the maximum tax benefit from the IRS for your contribution, and you can set up the funds to continue even after your death.
Donor-advised funds tend to have a more complicated tax structure compared to other types of charitable giving. Your bank or wealth manager can help with making contributions to a DAF that follow IRS guidelines.
If you have a property that you’re no longer using and would have to pay a large tax if you sold the property, you may find that donating that real estate to charity is a good option. If you are still living in the property that you’d like to give away, you can set it up to become a charitable contribution by having the deed to your real estate transferred after your death.
At that point, the value of the home will be taken out of your estate, lowering your estate taxes. In some cases, you may be eligible for a tax deduction equal to the fair market value of the real estate, too.
The IRS requires you to file Form 8283 to report noncash contributions of property valued at more than $500. Donations of real estate must also be properly documented.
A cash gift is the simplest form of charitable giving. Your tax deduction is equal to the amount of cash you donated, minus the value of any goods or services you received in return. For example, memberships to nonprofits, like a zoo or some other organization, are considered cash gifts. Titles, certificates, or stocks are not transferred in a cash donation either. The benefit of gifting cash is that it’s incredibly simple to do, and there are no confusing tax deductions or benefits to handle. The only thing you will need is some sort of record of the cash contribution. The IRS states that you can't deduct cash contributions, no matter how small, unless you have a record or receipt of the contribution.
One of the most tax-efficient ways to give is by contributing long-term appreciated securities, like stocks. There are two advantages to donating in this way.
One, since you are not selling your stocks, there are no capital gains taxes to be concerned with. The second advantage is that any of your stocks that were purchased over a year ago that have a current value greater than their original cost can be donated and become eligible for a tax deduction equal to the full fair market value of the stock.
There are two types of charitable trusts you may be interested in making part of your financial plan—a charitable lead trust (CLT) and a charitable remainder trust (CRT).
Charitable Lead Trust (CLT)
This is a trust that you establish by transferring assets into the trust and donating a stream of income from the assets to a charitable organization each year. Money left in the trust at the end of the period you’ve established to donate can be disbursed to other beneficiaries or held in the trust. Your gift tax deduction is immediate and based on the value of the income stream to the charity. Not only is this great for transferring wealth to your heirs, but it also provides consistent cash flow to the charity of your choice. The only disadvantage is that it requires annual administrative management.
Charitable Remainder Trust (CRT)
A CRT is similar to a CLT, with one big difference. In a CRT, the beneficiaries and donors are paid first, receiving their stream of income before the charitable organization does. However, this is beneficial as it gives you and your beneficiaries income and diversifies your investments.
This may be a good option for those with highly appreciated investments that want to create income but still provide consistent cash flow to a charity. Like a CLT, the only disadvantage is the annual administration of the trust.
An estate planning attorney can help with creating a CLT or CRT for charitable giving purposes. Keep in mind that the setup and maintenance of charitable trusts may be costly when you factor in attorney fees and the fee paid to the trustee.
A major advantage of giving your assets, such as retirement accounts and life insurance policies, to charity is that in addition to any charitable income tax deduction, your estate will not have to recognize that gifted income, which can give you a break on the estate tax. Many also choose to use assets that would normally have an income tax liability, leaving tax-deferred accounts in their estate for beneficiaries, giving them a nice inheritance that won’t be taxed.
You may also have tangible assets you want to donate to charity. These items, like art and jewelry, may entitle you to a tax deduction equal to the value of the assets you’ve donated. If your asset is related to the charity, such as art to a museum, you’re more likely to receive a larger tax deduction than gifting something that doesn’t directly correlate with the organization’s aim or mission.
Remember to document any gifts made to charity, cash or otherwise. That includes keeping a record of what was donated, to which organization, the date of the donation, and the amount of the cash donations or estimated fair market value for noncash assets.
Pooled Income Fund
If you’re looking to generate income but want to give smaller portions to charity, a pooled income fund may be your best choice. You can “pool” together different securities and/or combine them with cash to create a larger amount of money to distribute to charity. Money is paid out to you and any other beneficiaries that have pooled together assets to the fund. At your death, the remainder of the pooled income fund is donated to charity. In some cases, you may be able to receive a charitable tax deduction equal to the amount of money a charity is expected to receive.
Private foundations are charities set up as charitable trusts or corporations. If you’re looking to set up your own charitable foundation, a private foundation is a great way to get the family involved, particularly if you have a cause that’s very dear to your heart. Although there are stricter regulations and tax laws, a private foundation can give grants to individuals and you can retain control of donated assets.
- Before pursuing a charitable giving plan, it's important to consider the financial and tax implications of doing so.
- From cash or property donations to donor-advised funds or charitable lead trusts, there are several options to consider when donating to charity.
- Discussing the options with your financial advisor, accountant, or estate planning professional can help you find the best option (or options) for charitable giving so you can maximize gifts while minimizing potential tax implications.
Frequently Asked Questions (FAQs)
How much charitable giving is tax deductible?
Generally, charitable cash contributions you can deduct from your taxes are limited to up to 60% of your adjusted gross income (AGI). You'll need to itemize and use Schedule A. For tax year 2021, if you take the standard deduction, you can deduct up to $300 (single filers) or $600 (married taxpayers filing jointly) for cash contributions made to qualifying charities in 2021.
What is charitable giving?
Giving money or property, such as clothes, household items, or even a vehicle, to a qualified 501(c)3 nonprofit is considered charitable giving. A charity must have a 501(c) status if you want to deduct your donations from your federal taxes.