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Many people, regardless of whether they are of modest means or have a high net worth, want to be charitable and generous to causes and institutions that they support. One way to do so is by making contributions of cash, investments (like stocks and mutual funds) and real estate to charities or other nonprofit entities.
Depending on the charitable contribution strategies that you use, you could be - and you may even use financial leverage to greatly increase the amount you give. In addition, it is possible that you may receive a charitable giving tax deduction. This can create a win-win situation for the charitable entity, as well as for you and your loved ones.
Before you do anything, though, it is critical that you first discuss your goals and options with an experienced financial professional who can ensure that you've covered all the bases. Otherwise, you could find that your charitable deductions and other benefits might not be what you had anticipated.
If you're wondering about the most advantageous ways to help support your church, educational institutions and other worthy causes - both during your lifetime and beyond - creating a charitable contribution plan could be the answer.
A charitable donation is a gift of cash or property that is made to a nonprofit organization. These donations can help charitable entities accomplish their goals. In addition, donors may receive a tax deduction or other benefits for doing so (but this is not necessarily always the case).
It is important to note that the Internal Revenue Service restricts the types of donations that can be made, as well as the organization that can receive them. For instance, the acceptable charitable organizations and entities include the following:
Gifts that are given directly to an individual - even if the purpose is charitable - do not qualify as tax-deductible charitable contributions or donations.
In addition to helping a charitable organization that is close to your heart, there are other benefits of contributing. One of them is the tax deductions you could receive. These can include income tax, capital gains tax and estate tax reduction strategies.
You could reduce your income taxes or receive a larger tax refund in the years you donate to a charitable entity. For instance, when you make donations to a 501(c)(3) public charity, you can reduce your overall income tax liability. This is because your income tax rate is applied to a lesser amount of income for the year in which the contributions were made.
Typically, donors must itemize on their tax return in order to claim charitable deductions. This is because a primary factor in determining the tax benefits of a charitable gift is the charitable contribution standard deduction.
In this case, for the 2022 income tax year, single tax filers may claim a standard deduction of up to $12,950, and married couples who file their return jointly can claim up to a $25,900 standard deduction.
Note that if you itemize your deductions, the limit for charitable donations of cash is typically 60% of your adjusted gross income (AGI). But this limit was raised to 100% for the 2021 tax year due to the COVID-19 pandemic. For donations of property, the deduction limit is either 20%, 30% or 50%, based on the type of property that is donated.
By donating long-term appreciated assets, such as stocks, bonds and property to a charitable organization, you typically won't have to pay capital gains taxes on the gains. In addition, you may also be able to take an income tax deduction for the full fair market value of the donated assets. (Long-term gains pertain to those generated on assets held for longer than one year.)
The long-term capital gains tax rates (in 2022) are 0%, 10% or 20%, and are based on your taxable income amount and tax-filing status as follows:
| Capital gains tax rate | Taxable income (single tax filer) | Taxable income (married filing jointly tax filer) |
|---|---|---|
| 0% | Up to $41,675 | Up to $83,350 |
| 10% | $41,675 to $459,750 | $83,350 to $517,200 |
| 20% | Over $459,750 | Over $517,200 |
Note that short-term capital gains taxes are levied on assets that were held for less than one year. These tax rates correspond to regular income tax rates and brackets. For tax year 2022, these are:
| Tax rate | Taxable income (single tax filers) | Taxable income (married filing jointly tax filers) |
|---|---|---|
| 10% | Up to $10,275 | Up to $20,550 |
| 12% | $10,276 to $41,775 | $20,551 to $83,550 |
| 22% | $41,776 to $89,075 | $83,551 to $178,150 |
| 24% | $89,076 to $170,050 | $178,151 to $340,100 |
| 32% | $170,051 to $215,950 | $340,101 to $431,900 |
| 35% | $215,951 to $539,900 | $431,901 to $647,850 |
| 37% | Over $539,900 | Over $647,850 |
It is possible that federal estate taxes could be levied on your assets at the time of your passing. By making charitable contributions, though, you could divert taxes away from Uncle Sam and have more go toward noble causes.
In this case, by removing assets from your estate before the total amount is tallied (and taxed), these will be less of a “base” on which to levy taxation. These federal estate and gift tax exemption is currently (in 2022) $12.06 million per individual. But it is possible that this amount could decrease in the future, leaving more of your assets at risk of being taxed.
It is also possible that you could be subject to state estates taxes, too. There are presently (in 2022) several states, plus the District of Columbia, that impose their own estate or inheritance tax - and the associated exemptions are typically lower than the federal estate tax exemption. So, making charitable donations could also help you reduce the tax “base” for these taxes, as well.
| Year(s) | Exemption | Year(s) | Exemption |
|---|---|---|---|
| 1987 through 1997 | $600,000 | 2015 | $5,430,000 |
| 1998 | $625,000 | 2016 | $5,450,000 |
| 1999 | $650,000 | 2017 | $5,490,000 |
| 2000 and 2001 | $675,000 | 2018 | $11,180,000 |
| 2002 through 2010 | $1,000,000 | 2019 | $11,400,000 |
| 2011 | $5,000,000 | 2020 | $11,580,000 |
| 2012 | $5,120,000 | 2021 | $11,700,000 |
| 2013 | $5,250,000 | 2022 | $12,060,000 |
| 2014 | $5,340,000 |
These states include:
Working with a financial professional who is also well-versed in estate planning techniques could help you to reduce your income, capital gains and estate tax liability.
In addition to financial advantages, there are other benefits that can come along with making charitable donations, as well. One of these is that your heirs and other loved ones may become philanthropic, too, based on the example you set. Doing so may require some guidance from you, though - at least initially.
For instance, you could get your loved ones involved by sparking conversations about philanthropy with younger family members. Doing so could entice them to keep the tradition of charitable going for many years in the future.
In order to foster a philanthropic mindset and invite their interest and participation, you could start with asking them a variety of open-ended questions such as:
Once you have done so, you could move forward by creating an annual family giving budget and then earmarking certain amounts for the organization(s) that you've chosen.
Depending on your situation and objectives, there are many strategies that you could use for leveraging and maximizing your charitable contributions, as well as various tax breaks you could receive.
Some of the more common avenues for doing so include:
One of the easiest ways to make a charitable donation is to offer cash and/or investments directly to the organization. If you have incurred a significant gain in any of these assets, it could also benefit you from a capital gains standpoint.
Depending on the asset, it may require getting an appraisal. For instance, unlike stocks or mutual funds that have a specific value or price associated with them, the value of art and other collectibles isn't always readily available.
You could also consider a “part gift, part sale” in order to offset capital gains taxes and rebalance your portfolio. Rebalancing involves selling positions that have exceeded their target allocation, and then allocating the proceeds from that sale to investments that have become underrepresented.
In this case, if you itemize your income tax deductions, you could claim an income tax deduction for donating some of the appreciated assets to the charitable organization. This could ideally be in an amount that can offset gains from selling other appreciated assets within the same tax year.
Another great way to leverage your charitable contributions is to make a charity or organization the beneficiary of your life insurance policy. This can literally allow you to pay pennies on the dollar (i.e., pay the life insurance premium) while the entity receives a large lump sum that is income tax free upon your passing.
Depending on your age and health condition at the time you apply for the life insurance coverage, you may be able to pay $100 or $200 per month for a death benefit of $100,000 or more. So, you could provide a significant amount of funds to the charity without allocating nearly that much out-of-pocket.
There are other ways you could benefit charities, too, through life insurance. For example, if you have a policy that pays dividends, you could have these payments rerouted to the charitable organization. (It is important to keep in mind, though, that even though some insurance companies have consistently paid dividends for over a century, these payments are not guaranteed in the future.)
The qualified charitable distribution, or QCD, rule allows traditional IRA owners to exclude their required minimum distributions from their adjusted gross income - provided that they give the money to a qualified charitable organization.
So, if you (and/or your spouse, if applicable) are age 72 or older, and you are subject to the IRS required minimum distribution rules with a traditional IRA, making charitable donations from the retirement account could be beneficial. This strategy can also reduce your overall taxable income in the years you make these contributions.
In addition, because your adjusted gross income is used in a number of other tax calculations, having a lower taxable income amount may also allow you to stay in a lower income tax bracket. This, in turn, could reduce - or possibly even eliminate - any taxes on your Social Security income that you may have otherwise been subject to.
Another strategy for leveraging your charitable contributions is to set up a charitable trust. There are different types of charitable trusts that may be used. One is the charitable remainder trust, or CRT.
A charitable remainder trust is a type of trust that may be included in your estate plan. CRTs are tax-exempt trust instruments that allow you (or other donor) to make current gifts of assets and/or property now, while at the same time retaining the ability to continue receiving income from them during your (and your spouse, if applicable) lifetime.
The trust can name the charitable organization to receive the proceeds at your passing. This means that the charity is the “remainder” beneficiary,” because it will receive the remainder of the assets in the trust.
Provided that the charitable remainder trust is properly set up, you (as the donor) won't owe capital gains tax on the appreciation of the assets in the trust. So, the charity can net more assets in the future.
There are variations of the charitable remainder trust. These can include the:
A charitable remainder unitrust is a type of trust agreement that splits the benefits between an individual and a charity. In this case, the donor transfers assets into the trust in exchange for income payments.
Likewise, a charitable remainder annuity trust also entails the donor placing assets into the trust, with the trust paying out a set amount of income to the donor or a specified beneficiary. Upon death, the remaining assets go to the charity.
While these trusts seem to be similar, there are actually some differences. For example, with a CRAT, the trust will pay the donor a fixed percentage of the asset value at the time they were donated. These income payments are typically made on an annual basis. So, in this scenario, the amount of income is the same each year.
The donor in a CRUT also receives an annual income stream. However, each year the assets in the trust are re-valued, and the income is based on a percentage of that value. Therefore, the dollar amount received can fluctuate from one year to another.
Charitable lead trusts are different. These are designed to reduce your taxable income by first donating a portion of the trust's income to a charitable entity. Then, after a set period of time, the remainder of the trust will be transferred to the beneficiaries.
The payments that are made to the trust can go on for a pre-set time, such as 10 or 20 years, or for the remainder of your (i.e., the donor's) lifetime. Likewise, the amount of these payments can be a set dollar amount or instead, they could be a certain percentage of the trust's overall value.
At the end of the charitable lead trust's term, the principal that is still remaining in the trust will be distributed to your (the donor's) family or other beneficiaries, or alternatively it can go to a trust that is set up for your loved ones.
A donor advised fund is like a charitable investment account that is set up for the sole purpose of supporting charities and similar organizations that you care about. Donors can contribute cash, securities and other types of assets into the fund.
You are typically allowed to take an immediate tax deduction on the donation. Then, the assets can be invested for tax-free growth going forward and are ultimately granted to any IRS-qualified public charity.
While there are numerous benefits to donating to a charity, there are also some items to consider before you move forward. These can include:
Working with a qualified financial professional can help you to answer these questions and to set up a charitable giving strategy that works best for you and your specific goals and objectives. It can also better ensure that the paperwork, funding and other criteria are properly in place so that you and the charitable organization receive the most benefit.
There are many ways to get a bigger bank for your buck when it comes to charitable contribution strategies. While some are fairly simple, such as direct donations of cash, others can have a plethora of many “moving parts.”
That is why it is recommended that you work with a financial professional who is knowledgeable about charitable giving and the multitude of techniques for doing so. When going this route, you can better ensure that the methods you use line up with your particular short- and long-term financial objectives.
Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.
