How to Do Well by Doing Good: Charitable Giving and Tax Benefits
Charitable giving can provide significant tax advantages, along with the satisfaction of supporting causes you care about. By understanding the various ways to donate and the tax rules surrounding them, you can make the most of your charitable contributions while also benefiting financially.
Here’s a breakdown of the key charitable giving strategies and their tax consequences:
1. Itemized Deductions for Charitable Contributions
To maximize the tax benefit of your donations, you must itemize your deductions. The Tax Cuts and Jobs Act (TCJA) has raised the standard deduction and limited or eliminated many itemized deductions (except for charitable donations) through 2025. As a result, many taxpayers are better off taking the standard deduction rather than itemizing. If you’re one of them, you might consider “bunching” donations into alternating years to exceed the standard deduction threshold and benefit from itemizing in those years.
2. Cash Donations
Cash donations are the easiest to make and substantiate. Here’s what you need to know:
Documentation:
Donations under $250 must be supported by a canceled check, credit card receipt, or a written communication from the charity.
Donations of $250 or more require written confirmation from the charity.
Limits:
Cash donations to public charities can’t exceed 60% of your AGI.
Donations to nonoperating private foundations are limited to 30% of AGI.
Contributions exceeding these limits can be carried forward for up to five years.
Alternative Minimum Tax (AMT): Charitable contributions are allowed for AMT purposes, but the savings might be less if you are subject to AMT. Your deduction could be worth a lower percentage (e.g., 28% vs. 37%) of your donation.
3. Stock Donations
Donating appreciated publicly traded stock that you’ve held for more than a year is one of the best ways to give:
Tax Benefits:
You can deduct the current fair market value of the stock and avoid paying capital gains tax on the appreciation.
This is especially beneficial if you’re subject to the 3.8% Net Investment Income Tax (NIIT) or the top 20% long-term capital gains rate.
Limits:
Donations of long-term capital gains property are limited to 30% of AGI for gifts to public charities and 20% for nonoperating private foundations.
Important Tip: Don’t donate stock that is worth less than your original purchase price. Instead, sell it to claim the loss and then donate the cash proceeds.
4. IRA Qualified Charitable Distributions (QCDs)
If you are age 70½ or older, you can make direct contributions from your IRA to a qualified charity:
Benefits:
The contribution counts toward your Required Minimum Distribution (RMD).
The distribution is not included in taxable income.
No charitable deduction can be claimed for the QCD, but it might be beneficial if you don’t benefit from a charitable deduction due to AGI-based limits.
Limits:
There is an annual limit for QCDs, which is indexed for inflation.
The SECURE 2.0 Act allows for one-time QCDs up to a specified limit through a charitable gift annuity or charitable remainder trust (CRT).
Note: The QCD must be made directly from the IRA trustee to an eligible charity, and donor-advised funds or supporting organizations are not eligible recipients.
5. Other Types of Donations
You can donate a wide variety of assets beyond cash and stock, including:
Vehicles
Collectibles
Services
Use of Property
Each type of donation has its own rules for tax deductibility, so it’s important to verify the requirements for your specific situation. For example:
Vehicles: Donating a car may allow you to claim the fair market value or the sales proceeds, depending on the circumstances.
Services: While you cannot deduct the value of your time or services, you can deduct out-of-pocket expenses incurred while performing volunteer work (e.g., mileage, supplies).
Tip: Refer to the IRS chart or consult a tax advisor to ensure you’re following the rules for each type of donation.
Making Gifts Over Time: Charitable Giving Strategies for Long-Term Impact
If you’re interested in making significant charitable contributions but aren’t sure which charities to benefit, there are several strategies you can explore. From establishing private foundations to using donor-advised funds (DAFs) or charitable remainder trusts (CRTs), you can control how and when your donations are distributed, while also reaping tax benefits. Here’s an overview of the key options:
1. Private Foundations
A private foundation allows you to have significant control over how your donations are used. You can make large contributions now, then manage and direct the disbursements over time. However, there are a few important considerations:
Costs: Running a private foundation can be expensive, as it requires compliance with complex rules and administrative oversight.
Deduction Limits: Donations to nonoperating private foundations have lower deduction limits (30% of AGI for stock donations, 20% for nonoperating private foundations).
Control: You can retain control over how your contributions are distributed, but be mindful of the operational and legal requirements.
2. Donor-Advised Funds (DAFs)
If you prefer to influence how your donations are spent but want to avoid the complexities of running a foundation, a donor-advised fund (DAF) may be an ideal solution. Many public charities offer DAFs, which allow you to:
Contribute assets (e.g., cash, stock, etc.) to a fund.
Advise the charity on where the funds should be granted, although the sponsoring organization retains legal control over the assets.
Tax Deduction: You can take a tax deduction for your contribution, but you must obtain written acknowledgment from the sponsoring organization that it has exclusive legal control over the assets.
Tip: DAFs offer flexibility, ease of administration, and the ability to make contributions to charities over time, while benefiting from an immediate tax deduction.
3. Charitable Remainder Trusts (CRTs)
A charitable remainder trust (CRT) is a way to benefit both yourself and a charity:
How it works:
You receive income from the CRT for a fixed term or for life.
At the end of the term, the remaining assets go to one or more charities.
When you fund the CRT, you receive an income tax deduction for the present value of the charitable portion of the trust.
The assets are removed from your estate, reducing potential estate tax liabilities.
Tax Benefits: CRTs allow for tax-free growth of the assets held in the trust and defer capital gains taxes when the CRT sells appreciated assets.
Capital Gains: The CRT can sell appreciated assets without incurring capital gains taxes, allowing the proceeds to be reinvested, which can be especially beneficial if you own non-income-producing assets (e.g., real estate, appreciated stock).
Tax Deferral: When you receive income from the CRT, part of it may be taxable as income, but the tax is spread out over time, potentially reducing exposure to high capital gains rates or the Net Investment Income Tax (NIIT).
Tip: A CRT can help diversify your portfolio and manage single-stock exposure risk. If you want to provide for heirs while benefiting charity, this could be a smart strategy.
4. Charitable Lead Trusts (CLTs)
A charitable lead trust (CLT) is another option to benefit both charity and your loved ones:
How it works:
For a fixed term, the CLT pays amounts to one or more charities.
At the end of the term, the remaining assets pass to family members or other beneficiaries.
The assets are removed from your estate, which can help lower estate taxes.
Tax Benefits: When you fund the CLT, you make a taxable gift equal to the present value of the amount that will go to the remainder beneficiaries.
Section 7520 Rate: The remainder interest in the trust is determined based on the Section 7520 rate, which affects the size of the taxable gift. The lower the rate, the smaller the taxable gift, which reduces your gift tax liability.
If the trust’s assets outperform the Section 7520 rate, the excess earnings are passed to your beneficiaries without gift or estate taxes.
Impact of Interest Rates: Higher interest rates have increased the Section 7520 rate, making CLTs less attractive in recent years. However, future interest rate reductions could make CLTs more beneficial again.
Tip: CLTs may be less appealing when interest rates are high, but the gift and estate tax exemption could mitigate the benefits depending on your circumstances.
5. Qualified Charities
Before you make any donation, it’s important to ensure that the charity is eligible to receive tax-deductible contributions. You can use the IRS’s Tax Exempt Organization Search tool to verify the status of any charity. Only qualified organizations are eligible for tax-deductible gifts, so be sure to check the status of any charity you plan to support.
Note: Political donations are not deductible under federal tax law, so ensure your contributions go to legitimate charitable organizations.