Charitable giving can make a powerful, positive impact. When planned strategically, charitable donations can not only benefit the causes you care about but also offer significant tax benefits such as deductions and other incentives to reduce your taxable income. In this blog, we’re exploring the various tax benefits of charitable giving to help you make informed decisions that support both your community and your financial future.
Charitable Contribution Deductions
As a donor, if you choose to itemize deductions on your tax return rather than take the standard deduction, you can deduct contributions made to qualified charitable organizations. These can include cash donations, property, or other assets donated to organizations like nonprofits, educational institutions, or religious groups. For cash donations, donors can generally deduct up to 60% of their adjusted gross income (AGI). For non-cash assets, such as real estate or personal property, the deductible amount may vary and may be capped at 30% of AGI, depending on the nature of the asset and the charity type.
Additionally, you may be able to make deductions for volunteering expenses. While volunteer time itself isn’t deductible, out-of-pocket expenses related to volunteer work may be. This can include travel, supplies, uniforms, and other costs directly associated with the charity, as long as they are necessary to the work being done.
It is also important to note that some states offer additional tax incentives or credits for charitable contributions, which can enhance federal tax savings. Talk to your financial advisor to learn more about your options to maximize your tax savings while giving back to your community.
Qualified Charitable Distributions (QCDs) and Donor Advised Funds (DAFs)
A QCD allows individuals who are 70 ½ years of age or older to make tax-free donations directly from their IRA to charity, with an annual limit of $100,000 per person. QCDs are counted toward the Required Minimum Distributions (RMDs) for the year, allowing you to reduce your IRA balance without increasing taxable income and triggering additional income tax. This is particularly beneficial for those who do not itemize deductions, as this tax benefit doesn’t require itemization.
DAFs are another tax-efficient way to manage charitable contributions. Contributing to a DAF allows you to receive an immediate tax deduction in one tax year and then decide which charities to support over several years. This flexibility is especially helpful for high-income years when you need a larger deduction or for folks who alternate between taking the standard deduction and itemizing in different years.
Donation of Appreciated Assets
Donating long-term appreciated assets, such as stocks, bonds, or real estate, allows the donor to avoid paying capital gains tax and still claim a charitable deduction.
When donating an asset held for over a year, the deduction amount is generally the fair market value of the asset at the time of donation. This benefits you as a donor significantly because you avoid the capital gains tax you would otherwise owe if you sold the asset, potentially increasing the tax savings associated with your charitable contribution.
Carryover of Excess Contributions
If your total charitable contributions exceed the allowable deduction limit for the year, you can carry over the excess and apply it to future tax years. Charitable contributions above the AGI limits can be carried forward for up to five years, allowing donors to maximize their deduction over time, spreading the tax benefits and potentially avoiding the need to limit annual giving.
Estate Tax Benefits
For high-net-worth individuals, charitable giving can also be a strategic part of estate planning, as it reduces the size of the taxable estate, thereby lowering estate tax obligations.
Donations made as part of an estate plan can lower the estate’s value, which is especially beneficial for estates that exceed the federal estate tax exemption amount. Additionally, charitable bequests can be deducted from the estate’s gross value, which may reduce the overall estate tax liability.
Our Favorite Charitable Organizations
Are you ready to make charitable contributions but unsure where to start? These are some of our team’s favorite organizations to support:
- Rob and Yesy’s pick: United Way, developing community resources and partnerships that support a broad array of critical health and human service needs in our community
- Steve’s pick: Kiwanis, improving the world one child and one community at a time.
- Emily’s pick: SPUR North Shore, mobilizing volunteers in service and enrichment opportunities to support the needs of the North Shore Community.
- Larry’s pick: Wings for Widows, providing free, professional coaching and education to help widowed men and women navigate the financial trauma experienced in widowhood.
- Donna’s pick: Junior League of High Point, committed to promoting voluntarism and developing the potential of women in our community.
- Cara’s pick: Community Servings, an organization providing medically tailored, nutritious, scratch-made meals to chronically and critically ill individuals and their families
- Erin’s pick: Best Buddies, which serves individuals with intellectual and developmental disabilities (IDD) and their families.
To fully leverage the tax benefits of charitable giving, it is essential to fully understand the rules and regulations at hand. It is also recommended that you consult a financial advisor who can guide you in making tax-efficient donations. At Blakely Financial we are here to help you navigate these decisions so you can give with confidence, knowing your contributions are making a meaningful impact both for others and for your own financial future. Contact us today to get started.