While donating to charity is a worthy and noble activity, many people don’t realize the full tax benefits they can reap from their philanthropy. Being strategic about how you donate not only maximizes your gifts’ value to the organizations you support, but it can also lower your taxes significantly.
Know the basics
First, understand the basic rules for charitable deductions. Only donations to 501(c)(3) tax-exempt organizations generally qualify deductions. Professional groups, political campaigns and lobbying organizations don’t count. Gifts you make to religious organizations, such as a church or synagogue, will qualify for deductions in many cases. However, it’s a good idea to check the tax-exempt status of any religious organization in advance.
How much you can deduct depends on what you’re giving. Cash gifts can be deducted up to 50% of your adjusted gross income (AGI). Donated assets, such as securities, used vehicles, or used household goods, can be deducted only up to 30% of your AGI. When you give assets, the donation is valued at the fair market value of those items, and any gifts valued at more than $5,000 require a professional appraisal.
Keep in mind that in order to claim a charitable deduction you must itemize your deductions. Also make sure to get receipts and other necessary documentation whenever you make a donation, so you have them in case you get audited.
Maximize your gifts
While outright cash donations are most common, other types of gifts can provide greater tax benefits. For example, donating highly appreciated assets, such as company stock options, land, properties, business ownership or even artwork, allows you to forgo paying capital gains tax on that appreciation along with providing you a tax deduction. (The organization also won’t pay capital gains taxes when it sells the asset, thanks to its tax-exempt status.) When donating appreciated stock that you’ve held less than one year, you can deduct the amount you paid for the stock, but can’t deduct any appreciation.
It makes sense to evaluate which assets—those you’re willing and able to part with, of course—that you can give to charity and will provide the greatest benefit to both you and the organization.
Also consider timing your gifts carefully. For example, you might concentrate your donations in years when you expect to generate more income and therefore will be in a higher tax bracket and will qualify for a larger deduction.
Give more strategically
Certain techniques and tools can allow you to give more effectively. Donor-advised funds (DAFs), for example, are accounts maintained by a 501(c)(3) “sponsor organization” that allow you to get an immediate tax deduction for your donations, while directing money over time to causes of your choice.
Many DAFs offer donors extra services, such helping identify worthy causes that meet their philanthropic goals and donation recordkeeping. DAFs may also allow donors to invest their charitable contributions in mutual funds until the donation is handed over to a specific charity.
Because there are so many opportunities to give more effectively and tax-efficiently, it makes sense to plan your charitable gifting strategy carefully. A wealth advisor or investment professional can help you analyze your current financial situation every year and design a giving strategy that fulfills your philanthropic goals while also saving you money.
First Republic does not provide tax or legal advice - Client’s tax and legal affairs are their own responsibility. Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this document.