Charitable Giving: Know Your Options for Maximum Tax Benefits

Giving cash and other assets to an organization whose mission you support can be deeply gratifying on a personal level, but the tax benefits may be an even greater motivator. 

Charitable giving is a key tax planning strategy for millions of people. Despite the economic challenges created by the pandemic, charitable giving increased by 4 percent in 2021. Americans gave $484.85 billion last year, according to the Giving USA 2022 Report. Two-thirds of that money came from individuals. From religious institutions and schools to arts organizations and environmental groups, generous donors keep their favorite nonprofits afloat. 

Deciding that you want to support a worthy organization (and enjoy tax benefits from your donation) is only the first part of creating a charitable giving plan. But donors may be unsure about the next part: sorting through the many options for how to make tax-advantaged gifts. 

There are, in fact, many ways to approach charitable giving. While your tax advisors are the best resource for making decisions about how and when to make charitable gifts, here is an overview of some of the most common tax-advantaged charitable giving strategies. 

Charitable giving option #1: Donor-advised funds

Contributing to a DAF lets you take a tax deduction now, while spreading out your gifts in the future at your own discretion. 

A donor-advised fund works like this: The fund is sponsored by a public charity, which takes legal control of any assets you contribute to the fund. They are no longer part of your taxable estate and you may claim the maximum allowable deduction for the gift on your next tax return. 

However, donors retain advisory privileges over their contributions. The money you give to a DAF sits in an account until you decide you want to direct some or all of it to a specific charity. For example, an individual might put $25,000 in a DAF this year, take a $25,000 deduction and then disburse a $5,000 donation to a favorite charity every year for the next five years. Or, you might use your DAF account to recommend grants sporadically whenever you are compelled to support a particular organization. 

Charitable giving option #2: Using charitable trusts

Charitable remainder trusts (CRT) are often used as part of estate planning and long-term tax planning strategies. This kind of trust provides an income stream for the donor and has some other benefits. 

Very generally speaking, a charitable remainder trust works like this: The donor contributes assets to an irrevocable CRT, and names themself and/or other individuals as beneficiaries. The trust may have a set term limit or be set to end when the last named beneficiary dies. Beneficiaries receive a (taxable) annuity from the trust each year. When the trust’s term ends, the remainder is donated to charity. 

Making gifts through a charitable remainder trust may be a useful strategy for avoiding capital gains taxes on appreciated assets like stocks or real estate. Those assets can be sold within the trust without incurring capital gains taxes because they are owned by a tax-exempt charity. Donors can also use CRTs to reduce their taxable income, and claim a partial deduction for the projected amount of the remainder that the charity will eventually receive. 

Another option is a charitable lead trust (CLT), which is essentially the mirror image of a CRT. In a CLT, the trust makes payments to the designated charity throughout the term. When the trust term ends, any remainder amount is distributed to the account owner’s family members or other beneficiaries.  

Charitable giving option #3: Giving by bequest

Using your will and/or trusts to make postmortem charitable gifts can make sense for a number of reasons. First, you get to retain and use those assets for your entire life, and have the freedom to change your plans over time. Maybe the organization you intended to support takes a stand that you do not agree with, or you decide you would rather leave a certain asset to a family member than to charity. And if something shifts in your financial plan and you need those assets for your own care, they are still there. 

The downside of charitable giving by bequest is that you will not get any tax benefits during your life. However, assuming the beneficiary is a qualified tax-exempt charitable organization, the value of the donation may be used to reduce the taxable value of your estate—thereby minimizing or even avoiding estate taxes for your heirs. 

Charitable giving option #4: Qualified charitable distributions

This strategy is available to individuals obligated to take required minimum distributions from IRA accounts. Typically that means individuals who are at least 70 1/2 years old, but account owners with inherited IRAs may also make qualified charitable deductions. Account owners may elect to transfer their RMDs directly to a charity. This may be an attractive giving option if you don’t need the money from your RMDs and/or taking RMDs would push you into a higher tax bracket. 

Charitable giving option #5: Making direct donations

Writing a check, making a donation through an organization’s website or giving cash to an individual in need is an informal approach to charitable giving. If you want to support an organization that doesn’t qualify for 501(c)(3) tax-exempt status, knowing that you won’t get any tax benefits in exchange for the gift, making a direct donation is the easiest way. Save records of any tax deductible contributions made to tax-exempt charities for when you are ready to prepare and file your tax returns. 

Supporting a worthy cause through one or more of these methods is an admirable way to share your wealth and better your community. Just speak to your tax advisors before making any big decisions so you are prepared for any gift tax, income tax and/or estate tax implications that are connected to your charitable giving plan. 

 L&H’s tax team works with individuals and families to create charitable giving plans that benefit all parties. How does philanthropy fit into your long-term financial plan and goals for your legacy? Contact us today to talk. 

Wendi Haynes, CPA, serves as Livingston & Haynes’ Managing Partner and has been with the firm for over 30 years. Wendi has extensive experience providing accounting, auditing, tax, and advisory services for high net worth families, small businesses, and nonprofit organizations.