Tax deductions on charitable donations

Financial Life

 

Like many people, you may have a desire to “share the wealth” and utilize your resources in a way that can make a difference to your community or the causes that are close to your heart. The most effective approach is to develop a charitable giving strategy that assures you achieve the meaningful impact you intended.

You have tremendous flexibility in choosing how to give. Some approaches are simple and others are more sophisticated. It makes sense to take advantage of any tax benefits that will help you make the most of your gifting strategy.

A variety of ways to give

Direct gifts of cash – these can be made by check, credit card or even payroll deduction through your employer. If you itemize deductions, gifts to qualified public charities can be deducted in an amount not to exceed 60% of your adjusted gross income (AGI) in a given year. If donations are made to private charities (such as a family foundation), the annual limit to claim a tax deduction is 30% of AGI.

Gifting appreciated assets – if you hold publicly-traded securities or other types of assets that have appreciated in value, you may face a significant capital gains tax liability when you sell the asset. An alternative is to gift the appreciated asset to a qualified charity. You can claim a tax deduction equal to the fair market value of the asset, which in the case of an appreciated asset would exceed the cost you paid for it. The tax deduction cannot exceed 30% for gifts to a public charity or 20% for gifts to a private charity such as a family foundation.

Gifting other types of assets – you also have the ability to make gifts of real estate or life insurance policies. Capital assets such as land, buildings, machinery and appreciated securities that you have owned for at least one year are also worth considering as potential gifts.

Available deduction limits for charitable gifts

Current annual limits based on the type of gift and charity type:

Type of gift

Public charities

Private charities

Cash

Up to 60% of donor’s AGI

Up to 30% of donor’s AGI

Long-term appreciated property

Up to 30% of AGI based on fair market value of property

Up to 20% of AGI based on fair market value of property

 

Incorporating trusts as part of your gifting strategy

Trusts are another option you can consider that might provide more flexibility in directing a portion of assets to charitable organizations while also benefiting you or other beneficiaries. These are referred to as “split interest transfers.” Two of the most common are these forms of irrevocable trusts:

Charitable remainder trust – it allows you to make a charitable gift but retain a taxable income stream for a term of years or over the course of your life. When the term ends, remaining assets are passed on to the designated charities tax-free. A portion of the contribution to the trust is tax deductible.

Charitable lead trust – it is designed to reduce taxes on the estate of the deceased by first paying income to a charity (based on a rate determined by the IRS) for a stated period of years. When the term ends, the remaining value is directed to designated beneficiaries.

It makes sense to take advantage of any tax benefits that will help you make the most of your gifting strategy.

Other gifting strategies

In some situations, you may want to consider creating a more formal charitable structure. These options include:

Private foundation – individuals or families can establish a non-profit entity that is designed to direct gifts to other charitable organizations. The foundation retains control over how donations are invested and when and how the gifts are ultimately directed. There are limits on claiming tax deductions. At least 5% of the foundation’s assets must be distributed to qualifying charities each year. The foundation must comply with several administrative requirements, including the filing of annual tax returns.

Donor-advised funds – a less complex option than the private foundation. An individual transfers assets into the fund. The donor can recommend specified charities that the fund administrator may choose to support with the fund’s assets. The same deduction limits apply as for Public Charities (see the table). A full tax deduction can be claimed for assets directed to the fund in the year the fund is established even though assets can be distributed to charities over a period of years.

Tax planning is critical

It is important to note that while there are deduction limits for any given tax year, the unused portion of a deduction may be carried over for up to five years. To maximize your tax benefit, careful planning can be helpful. Take into consideration the value of the gifts you wish to make and your income projections for the coming years.

Note that there may be limitations on choosing itemized deductions due to new tax laws that took effect in 2018. That’s because the standard deduction has been increased significantly, making it less viable for some people to choose to itemize deductions in a particular year than was the case under previous tax law. However, you do have the ability to “bunch” contributions into a given year, making it feasible to claim itemized deductions in that year. Be sure to consult with your tax professional for more information.

We’re ready to help

As you plan your charitable gifting strategy, consider doing so as part of a holistic wealth plan. Your Wealth Management team from U.S. Bank or U.S. Bancorp Investments can help you assess your options as you consider the timing and form of the gifts you intend to make. Be sure to consult with legal and tax advisors as appropriate.