You've been giving cash and writing checks for years, and have given to the charities that you feel are important. But what if this isn't the most efficient way to get your money to those who need it the most? Giving cash and stuffing an envelope to a respected and impactful charity is an amazing feeling. If you itemize your deductions on your tax return, the deduction is a nice perk as well. Plus, you get the satisfaction of helping out your favorite cause. But being a savvy charitable donor can be confusing. Smart, alternative ways to give to charity include giving shares of stock, funding a Donor Advised Fund, distributing from IRA accounts, and starting a private foundation.
First, let's take a look at some charitable giving basics:
General Requirements for Income Tax Charitable Deduction
Made to qualified, 501(c)(3) organizations with charitable Tax ID number.
Subject of the gift is property (not services).
Deductible portion must exceed the value received by donor.
Paid in cash or property before close of tax year (December 31st).
What makes an organization a “Qualified Charity” – 501(c)(3)?
Must be operated exclusively for:
Religious, charitable, scientific, literary, or educational purposes
For the prevention of cruelty to animals or children
For income tax purposes, must be a domestic (U.S.) charity
No earnings may benefit a private party
No substantial propaganda or political lobbying
Charitable Acknowledgement Letters
Charitable organizations typically send emails or letters to donors confirming the amount of the deductible charitable gift.
Be sure to save your acknowledgement letters and emails for tax season!
Now that we covered the basics, what are the ways I can give?
Gifts of Service to Charity
Hours of service are not tax deductible
Since the value of the gift was never brought into income, a deduction cannot result!
Unreimbursed expenses and travel expenses are deductible
Mileage: 14¢ per mile deduction for 2022
Gifts of Cash to Charity
Fully deductible subject to Adjusted Gross Income (AGI) limitations
Excess contributions carry forward period: 5 years
Contributions to Institutions of Higher Education in return for a right to purchase tickets or seating at an athletic event
No deduction is permitted (post-Tax Cuts and Jobs Act)
Can I give an unlimited amount regardless of my income level?
In short, no. There are limitations based on your Adjusted Gross Income, or "AGI".
Cash to a public charity in 2022–2025 = 60% of AGI.
LTCG property to Donor Advised Fund (DAF) is 30% of AGI.
Cash (2026 or later) or Short-term Capital Gain property to a public charity = 50% of AGI.
Cash and STCG property to a private foundation = 30% of AGI.
Long-term Capital Gain property to a public charity = 30% of AGI.
Long-term Capital Gain property to a private foundation = 20% of AGI.
What's a Qualified Charitable Distribution (QCD from IRA accounts)?
A qualified charitable distribution is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity.
QCD's can satisfy all or part the amount of your required minimum distribution from your IRA.
For example, if your 2022 required minimum distribution was $10,000, and you made a $5,000 qualified charitable distribution for 2022, you would have had to withdraw another $5,000 to satisfy your 2022 required minimum distribution.
Reduces taxable income which has the benefit of potentially lowering the Medicare bands that determine annual premiums.
What about charitable gifting of highly appreciated stocks and securities (via direct transfer to charitable organization)?
Avoid paying capital gains tax on sale of security
By donating stock that has appreciated for more than a year, you are actually giving 15-20% more than if you sold the stock and then made a cash donation.
Tax deduction for Fair Market Value (FMV) of donation
If a review of your investments’ gains and losses shows that it’s time to rebalance your portfolio to maximize its performance and optimize for risk, donating stock can give your portfolio the rebalance it needs.
What about charitable gifting of highly appreciated stocks and securities (via Donor Advised Fund or "DAF")?
Donor Advised Funds allow donors to front-load charitable deductions in high income years using cash or appreciated securities
Once the money is contributed, donors get an appropriate deduction based on AGI limits for the current tax year
The funds in the DAF can then be reinvested within the account and granted out over the donor's lifetime, all electronically
DAF's can be opened with organizations like Schwab Charitable, Fidelity Charitable, or your local Community Foundation
Note: DAF's cannot be used to satisfy pledges, buy a table for a charitable event, or recommend grants to individual or private foundations
What about a Private Foundation?
Generally, we would only recommend utilizing a private foundation if considering total donations in the millions of dollars. At the very least, $500K would be a starting point to begin contemplating the formation of your own foundation.
Distributions can be to charities including individuals, international organizations and scholarships
Mandatory 5% distribution of fondation capital every year, with annual filings publicly available
Donor can be an individual, family or business
Allows contribution of diverse pool of assets
Create structure and nominate board
In short, don't let your charitable giving plan take a back seat to other sound financial planning objectives! Instead, make it an integral part of your overall financial goals. Create an annual budget and stick to it every year, ensuring that your giving plan is thorough and well thought out. This way, you'll know exactly how much money you give away each year and to which organizations, and your plan will continue to evolve as situations change. You'll also feel good about yourself for taking a proactive approach to helping great charitable causes.
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