Giving to a charity is not only generous and needed but can bring significant tax deductions. Charitable giving is known as one of the most flexible tax planning tools because your choice of recipients is vast, and you can give at any time of the year (although deductions are based on IRS deadlines). As the holiday season approaches, now is the time to consider your charitable giving options.
The Tax Cuts and Jobs Act (TCJA) has essentially doubled the standard deduction and limited or eliminated many itemized deductions (other than the charitable deduction) through 2025. Under current law, itemized deductions are limited to state and local taxes, mortgage interest, charity and certain casualty and gaming losses. For taxpayers with limited mortgage interest and who may be subject to the $10,000 SALT cap, it can take more than $14,000 of charitable contributions before the first dollar is deductible. As a result, some taxpayers who typically have itemized in the past may be better off taking the standard deduction — in which case they won’t get a federal income tax benefit from charitable gifts. If you are such a taxpayer, you might benefit from “bunching” donations into alternating years. Planning to bunch large commitments in higher income years is one strategy to maximize the benefit of charitable contributions. See the section on Donor-Advised Funds (DAF) later in this article for more information.
To ensure you understand the tax consequences of your donations and can maximize any benefits, discuss with your tax advisor and your wealth management advisor which assets to give and the best ways and timing to give them.
Outright gifts of cash (which include donations made via check, credit card and payroll deduction) are the easiest. The key is to substantiate them. To be deductible, cash donations must be:
- Supported by a canceled check, credit card receipt or written communication from the charity if they’re under $250, or
- Substantiated by the charity if they’re $250 or more.
Deductions for cash gifts to public charities can’t exceed 60% of your adjusted gross income (AGI). Before the Tax Cuts and Jobs Act (TCJA), the limit was 50%. The AGI limit remains at 30% for cash donations to nonoperating private foundations. Contributions exceeding the applicable AGI limit can be carried forward for up to five years.
Note: Charitable contribution deductions are allowed for alternative minimum tax (AMT) purposes, but your tax savings may be less if you are subject to the AMT. For example, if you’re in the 37% tax bracket for regular income tax purposes but the 28% tax bracket for AMT purposes, your deduction may be worth only 28% instead of 37%.
Appreciated publicly traded stock you have held more than one year qualifies as long-term capital gains property, which can make one of the best charitable gifts. Why? Because you can deduct the current fair market value and avoid the capital gains tax you’d pay if you sold the property. This will be especially beneficial to taxpayers facing the 3.8% of Net Investment Income Tax (NIIT) or the top 20% long-term capital gains rate this year.
Donations of long-term capital gains property are subject to tighter deduction limits — 30% of AGI for gifts to public charities, 20% for gifts to nonoperating private foundations. In certain, although limited, circumstances it may be better to deduct your tax basis (generally the amount paid for the stock) rather than the fair market value, because it allows you to take advantage of the higher AGI limits that apply to donations of cash and ordinary-income property (such as stock held one year or less).
Don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.
Taxpayers age 72 or older are allowed to make direct contributions from their IRA to Qualified Charitable Organizations (QCDs), up to $100,000 per tax year. A charitable deduction can’t be claimed for the contributions, but the amounts aren’t deemed taxable income and can be used to satisfy an IRA owner’s required minimum distribution. In order to have the transfer to charity qualify for this unique limited exclusion rule, you must transfer Required Minimum Dollars (RMD) first. For taxpayers who have already distributed their RMDs earlier in the year, a QCD will not be available. Please consult your tax advisor.
A direct contribution might be tax-smart if you won’t benefit from the charitable deduction. To take advantage of the exclusion from income for IRA contributions to charity on your 2019 tax return, you’ll need to arrange a direct transfer by the IRA trustee to an eligible charity by December 31, 2019. Donor-advised funds and supporting organizations aren’t eligible recipients.
Other types of donations
Gifts of cash are simple and gifts of stock can be tax-smart, but many taxpayers make other types of donations, such as vehicles, collectibles, services and even use of property.
Making gifts over time | Donor-advised funds
If you don’t know which charities you want to benefit but you’d like to start making large contributions now, consider a private foundation. It offers you significant control over how your donations ultimately will be used.
You must comply with complex rules, however, which can make foundations expensive to run. Also, the AGI limits for deductibility of contributions to nonoperating foundations are lower. (See “Cash donations” and “Stock donations” above.)
If you’d like to influence how your donations are spent, consider a donor-advised fund* (DAF). DAFs are philanthropy’s fastest-growing means of giving. One of the main benefits of a DAF is that it is professionally managed at a lower cost. Established as a public charity, a DAF allows donors to make a charitable contribution and receive an immediate tax deduction, even if the donations are spread out over months or years. DAF accounts are set up within a sponsoring organization or “host charity”, such as a community foundation, which manages all investments, processes fund distributions and files appropriate tax returns. Up to 60% of a person’s adjusted gross income can be donated to a DAF. The tax deductibility can also be leveraged by contributing highly appreciated assets. The contribution is placed into a DAF account, where it can be invested and grow tax-free. The donor can recommend which qualified charities should receive grants from the fund over time, but ultimately cannot control where the money goes.
Note: To deduct your DAF contribution, you must obtain a written acknowledgment from the sponsoring organization that it has exclusive legal control over the assets contributed.
Charitable remainder trusts
To benefit a charity while helping ensure your own financial future, consider a charitable remainder trust (CRT):
- For a given term, the CRT pays an amount to you annually (some of which generally is taxable).
- At the term’s end, the CRT’s remaining assets pass to one or more charities.
- When you fund the CRT, you receive an income tax deduction for the present value of the amount that will go to charity.
- The property is removed from your estate.
A CRT also can help diversify your portfolio if you own non-income-producing assets that would generate a large capital gain if sold. Because a CRT is tax-exempt, it can sell the property without paying tax on the gain at the time of the sale. The CRT can then invest the proceeds in a variety of stocks and bonds.
You may owe capital gains tax when you receive the payments, but because the payments are spread over time, much of the liability will be deferred. Plus, only a portion of each payment will be attributable to capital gains; some may be considered tax-free return of principal. This may help you reduce or avoid exposure to the top 20% long-term capital gains tax rate or the NIIT. (See the Case Study “A CRT can reduce single-stock exposure risk.”)
You can name someone other than yourself as income beneficiary or fund the CRT at your death, but the tax consequences will be different.
Charitable lead trusts
To benefit charity while transferring assets to loved ones at a reduced tax cost, consider a charitable lead trust (CLT):
- For a given term, the CLT pays an amount to one or more charities.
- At the term’s end, the CLT’s remaining assets pass to one or more loved ones you name as remainder beneficiaries.
- 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.
- The property is removed from your estate.
For gift tax purposes, the remainder interest is determined assuming that the trust assets will grow at the Section 7520 rate. The lower the Sec. 7520 rate, the smaller the remainder interest and the lower the possible gift tax — or the less of your lifetime gift tax exemption you’ll have to use up. If the trust’s earnings outperform the Sec. 7520 rate, the excess earnings will be transferred to the remainder beneficiaries’ gift- and estate-tax-free.
Because the Sec. 7520 rate currently is still fairly low, now may be a good time to lock in a relatively low rate while still available and take the chance that your actual return will outperform it. Keep in mind, however, that the increased gift and estate tax exemption may reduce the tax benefits of a CLT, depending on your specific situation. (See the Chart “Transfer tax exemptions and rates.”)
You can name yourself as the remainder beneficiary or fund the CLT at your death, but the tax consequence will be different.
Before you donate, it’s critical to make sure the charity you’re considering is indeed a qualified charity — that it is eligible to receive tax-deductible contributions.
The IRS’s online search tool, Tax Exempt Organization Search, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access the tool by clicking here. According to the IRS, you may rely on this list in determining deductibility of your contributions.
Also, don’t forget that political donations aren’t deductible.
As always, consult your tax advisor and wealth management advisor before making any decisions.
*Helping clients establish donor-advised funds is one of the benefits offered by our sister firm, Smith & Howard Wealth Management.