Financial planning

 

Your guide to tax deductions on charitable donations

Like many people, you may have a desire to “share the wealth” and use your money in a way that can make a difference to your community or the causes you care about.

The most effective approach is to develop a charitable giving strategy that assures you achieve the meaningful impact you intended and take advantage of tax benefits along the way.

A variety of ways to give

Some approaches are simple; others are more sophisticated.

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 percent 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 percent 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 when you sell the asset. An alternative is to gift the appreciated asset to a qualified charity. For gifts of appreciated publicly-traded securities, you can claim a tax deduction equal to the fair market value of the asset. The tax deduction cannot exceed 30 percent of AGI for gifts to a public charity or 20 percent of AGI for gifts to a private charity such as a family foundation.

Gifting other types of assets

You can also make charitable 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 worth considering as potential gifts as well.

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

Most 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

An effective approach is to develop a charitable giving strategy that assures you achieve the meaningful impact you intended and take advantage of tax benefits along the way.

Incorporating charitable trusts as part of your gifting strategy

Trusts may 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 forms of irrevocable trusts:

Charitable remainder trust

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 or the life of someone you choose. 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

Often used as an estate planning technique to transfer assets to family with a discounted gift value, this type of trust first pays 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 non-charitable beneficiaries, typically family members.

Other gifting strategies

In some situations, you may want to consider creating a more formal charitable structure. 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 percent 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 an annual tax return.

Donor-advised fund

A less complex option than the private foundation. An individual transfers assets into the fund held at a public charity. The donor can recommend grants to public charities. Donors receive a tax deduction in the year that the contribution is made, and may direct grants from their fund over many future years.

Learn more about the difference between private foundations and donor-advised funds

Tax planning is critical

It’s 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 additional 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.

Additionally, the Tax Cuts and Jobs Act of 2017 increased the standard deduction 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, “bunching” donations and other strategies can help you maximize your donations. Be sure to consult with your tax professional for more information.