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Tax Strategies for Charitable Giving

Nov 01, 2024

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Charitable giving is not just a way for high-net-worth individuals to support the causes they care about most; it is also a powerful financial planning tool featuring several critical tax strategies. Integrating charitable giving tax strategies into your overall financial plan can be very complex. Still, it can also take your philanthropic impact (and overall tax savings) to the next level. 

We’re here to discuss some key aspects of charitable giving, including the symbiotic relationship between charitable giving and financial planning, the tax deductibility of specific charitable donations, and a few popular strategic giving techniques. 

Continue reading about tax strategies to empower your charitable giving, or contact Greater Houston Community Foundation today to start developing your tax-smart giving plan. We can partner with your current professional advisors to bring harmony to your financial and philanthropic life so that you can focus on what matters most to you. 

Key Insights

  • Make sure you’re giving to organizations that qualify for tax-exempt status. If you’re unsure whether an organization qualifies or not, the IRS provides a Tax-Exempt Organization Search Tool that you can use.
  • Cash, appreciated stocks, securities, and some goods or property are generally accepted for tax-deductible donations, but be aware of possible limitations. 
  • Donor advised funds are an essential tool for charitable giving, allowing donors to make immediate tax-deductible contributions and grow their impact over time. 
  • IRS limits for deductions will depend on the organization and type of donation but generally range from 60% to 30% of your AGI. 
  • Timing donations to high-income years, bunching multiple years of donations, and donating already-appreciated assets can help you maximize tax benefits and your charitable impact.

Table of Contents

What qualifies as a charitable donation?

First things first, what makes a charitable donation qualify for tax exemption? Charitable donations only qualify for tax exemption if they are made to an organization that qualifies for tax-exempt status and must meet a few other criteria as well. 

Cash donations, appreciated stocks and other securities, and some goods and pieces of property are generally accepted forms of charitable donations, but there can be limitations on donations of property and other appreciated assets. 

Donations to political campaigns, donations made with the expectation of significant returns, personal gifts, and donations to non-501(c)(3) organizations are examples of donations that likely won’t qualify as charitable. 

Types of organizations that qualify

Although charitable donations must be made to qualified charitable organizations, a few factors should be addressed regarding the organizational structure.

  1. 501(c)(3) nonprofit organizations. All organizations accepting charitable donations will generally fall under the 501(c)(3) umbrella, which contains both tax-exempt public charities and private foundations recognized by the IRS.
  2. Donor advised funds (DAFs). DAFs are charitable investment accounts that allow donors to make tax-deductible contributions, invest the money, and recommend grants to charitable organizations over time. DAFs might be the most essential charitable giving vehicle in your toolbox because they offer flexibility in giving and immediate tax deductions.
  3. Private foundations. Private foundations are nonprofit organizations created by individuals, families, or corporations. They offer more control over the charitable giving process but are subject to stricter regulations—and often have a much higher cost of entry than other giving vehicles. 

Continue reading about donor advised funds

What are the IRS rules for deducting charitable donations?

Not all charitable contributions are tax-deductible, and the amount you can deduct may be limited based on several factors. Donations to 501(c)(3) organizations are generally tax-deductible, but the amount you can deduct depends on:

  • The type of organization: Donations to public charities have higher deduction limits (up to 60% of adjusted gross income, or AGI) than donations to private foundations (usually capped at 30% of AGI).
  • The form of donation: Cash donations have a higher deductibility limit compared to donations of appreciated assets, which are typically capped at 30% of AGI.

Is it worth donating to charity for taxes?

Among the myriad of benefits philanthropy can have on your overall well-being, tax advantages stand out as a significant incentive. By donating to qualified charitable organizations, you can deduct the value of your contributions from your overall taxable income, thereby reducing your overall tax burden. 

The most simple example of this is overall taxable income lowering. For instance, if you’re in the 35% tax bracket and make a $10,000 Qualified Charitable Distribution (QCD), this amount is not considered taxable income, which effectively lowers your tax liability by $3,500. Additionally, you may also be able to reduce your taxable income and possibly lower your tax bracket further through other deductions. 

Tax benefits of donating to charity

Aside from income tax deductions, which are one of the most significant benefits of charitable giving, there are a few more tax advantages to donating to charity. 

Capital gains tax advantagesDonating appreciated assets (like stocks, bonds, or real estate) can be even more tax-beneficial for your bottom line than donating cash. Why? When you donate an appreciated asset that you’ve held for more than a year, you avoid paying capital gains tax on the asset’s appreciation—plus, you can deduct the asset’s total fair market value.Estate tax benefitsCharitable contributions can also reduce estate taxes. Just like charitable gifts during your lifetime, if you fold charitable donations into your estate plan, those gifts can reduce the value of your taxable estate and lower your estate tax liability. This is a particularly important consideration for families with large estates that may be subject to federal estate taxes.

Calculating tax relief on charitable donations

Maximizing your charitable impact and your tax savings is all about correctly calculating your deductions. While you should never attempt to go at it alone when making donations or doing your taxes, the process generally looks something like this:

  1. Determine the value of your contribution.
  2. Check the charitable organization’s status.
  3. Apply your deduction limits. 
  4. Calculate your tax savings. 

Using a charitable giving tax savings calculator online can be helpful, but you should always consult with your professional advisors before making significant charitable contributions. 

Tax-smart strategic giving techniques

If you’re looking to maximize the tax benefits for your giving this year, consider a few of the following strategic giving techniques. 

  1. Timing your contributions. It may seem simple, but timing is everything. Accelerating donations in years when you expect to have a higher adjusted growth income (AGI), and deferring when you don’t, can have a massive impact on your overall tax burden. 
  2. Bunching donations.Bunching charitable donations is a great way to dial in your contribution timing. By bunching your donations, you combine multiple years of charitable donations into one tax year, which allows you to exceed the standard deduction threshold and itemize your deductions for gifts over multiple years. 
  3. Consider donations beyond cash. Donating appreciated securities, including shares of stocks, bonds, mutual funds, or exchange-traded funds (ETFs), that you transfer to the Foundation prior to sale may be eligible for a fair market value deduction and avoids capital gains tax.
  4. Utilizing donor advised funds. Donor advised funds are such an essential part of tax-advantaged charitable giving that we’re going to give them their own section below. 

Continue reading about how to start a scholarship fund

More about utilizing donor advised funds

Donor advised funds (DAFs) are a powerful tool that allows donors to contribute varied assets, get immediate tax deductions, and recommend grants that align with their values and interests over time. They are increasingly popular for their ease of use, flexibility, and serious tax advantages. 

  1. Immediate deductions. The primary benefit of DAFs is that donors can take an immediate tax deduction when they contribute, even if those funds are distributed over long periods of time. This allows significant flexibility in constructing an overall charitable giving plan. 
  2. Investment opportunities. Funds within DAFs can be invested and grow tax-free, which can allow the potential for even larger returns and bigger impact. 
  3. Flexibility in gift types. DAFs, depending on who is managing them, take a number of different gift types, including cash donations, appreciated assets, real estate, and more. 

FAQ about tax strategies for charitable giving

What are the tax benefits of charitable giving?

Charitable contributions can be deducted from your taxable income, potentially lowering your overall tax liability. The specific benefits depend on your filing status, income level, and the type of charitable organization.

What types of charitable donations are tax-deductible?

Cash donations, securities, privately held business interests, real estate, tangible personal property, and more are generally deductible if given to qualified 501(c)(3) organizations. However, certain limitations apply depending on the type of property donated.

How do I determine if a charity is qualified?

You can verify a charity’s tax-exempt status by checking the IRS’s Exempt Organizations Select Check tool or reviewing its status on the IRS website.

Are there limits to how much I can deduct in charitable contributions?

Yes, there are limits based on your adjusted gross income (AGI). Generally, you can deduct up to 60% of your AGI for cash donations and 30% for donations of property. Specific rules may vary, so it’s crucial to consult IRS guidelines or a tax professional.

What documentation do I need for charitable contributions?

You must keep records of your donations. This could include bank statements, receipts from charities, and written acknowledgments for contributions over $250. Gifts other than cash and publicly traded securities over $5,000 require a qualified appraisal, according to the IRS.

Can I deduct donations made to individuals or non-qualified organizations?

No, donations made directly to individuals or non-qualified organizations are not tax-deductible. Only contributions to eligible 501(c)(3) organizations are eligible for deductions.

Are there tax advantages to donating appreciated assets vs. cash?

Yes, donating appreciated stocks, other assets, or real estate may provide a greater tax benefit, as you can avoid capital gains taxes on the appreciated portion and receive a deduction for the fair market value.

How should I factor charitable giving into my estate planning?

Charitable giving can be essential to estate planning, allowing you to leave a legacy while potentially reducing estate tax liability. Consider strategies such as bequests, charitable remainder trusts, or charitable lead trusts.

Partner with the Foundation to implement tax strategies for your giving goals

Charitable giving can be an effective way to reduce your overall tax burden while making a difference where it matters, but you’ve got to use tax strategies that address your unique needs. There is no one-size-fits-all approach for tax-smart giving; therefore, professional advisors you trust can make all the difference. 

At Greater Houston Community Foundation, we foster professional advisor partnerships to increase impact and help our clients reach their financial goals. If you are a high-net-worth individual or a professional advisor to someone who would like to collaborate on a personalized charitable giving plan, reach out to the Foundation today. 

You can call us at 713-333-2210 or reach out directly to get started.

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