Philanthropic Giving as Part of Your Tax and Financial Plan
When done strategically, charitable giving is the very definition of a win-win proposition. An organization whose mission you support gets much-needed resources to continue its work, while you enjoy the personal satisfaction and tax benefits of having used your money to do good in the world. When charitable giving is not carefully planned, the recipient still benefits—but the donor might run into some unexpected tax consequences. Philanthropy should be mapped out just as thoughtfully as everything else in your tax and financial plan.
Maximize deductions by contributing to qualified organizations.
How much a gift really costs you depends on whether you are able to deduct it on your next tax return. Gifts are only deductible when they are made to groups that fall within section 170 of the Internal Revenue Code’s definition of “qualified organization.” Donors may deduct gifts made to:
Churches, synagogues and other religious organizations.
Federal, state and local governments, as long as the gift is made for public purposes (like donating to build a playground in a city park).
501(c)(3) charities, which the IRS defines as organizations that exist “exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals.”
Nonprofit schools and hospitals.
War veterans’ groups.
Gifts made to political groups, social/sports clubs, groups that lobby for law changes and most foreign organizations are not tax deductible. Neither are gifts given to individuals. Contributions made to a GoFundMe campaign are usually not deductible, for example. (The site does host some charity fundraisers for which gifts can be deducted, but gifts to personal campaigns do not get the same treatment.)
Also, note that there are different rules when you make a contribution that benefits you financially. For example, say you make a donation to your alma mater to get access to premium tickets to football games. You can not deduct the portion of that donation that is equal to the value of the benefit you receive. So if you give the school a gift of $10,000 and receive tickets valued at $1,000, you could take a $9,000 deduction.
Consider a multi-pronged approach to giving.
Writing a check to charity is only one way to use your money for good. Depending on your goals, assets and guidance of your advisors, your financial plan might incorporate giving in several ways. Some are more tax-advantaged than others.
Direct donations: Giving money directly to a person or group in need might be emotionally gratifying for a donor, even if the gift does not have tax benefits because the recipient is not a qualified organization. When you make direct donations to an organization that does have tax-deductible status, get a receipt or other proof to hold onto until tax time.
Donations in kind: Making a non-cash donation to charity can help you get a tax break while off-loading assets you no longer need. Donating long-term appreciated assets like stocks or property to charity lets you avoid the capital gains taxes you would incur if you sold those items, and you can take a deduction for the full fair market value of the gift.
Gifting to family: Sharing wealth with younger relatives gives them a hand up as they are getting established. If family gifting is part of your financial plan, be mindful about gift taxes (more on that later). One tax-advantaged way to give a substantial gift to young family members is by paying their education costs directly. Tuition paid to a qualified institution is not subject to gift taxes.
Donor-advised funds: DAFs are funds administered by charities. Some financial institutions like Fidelity also have their own 501(c)(3) entities to run donor-advised fund programs. Donors can decide how their contributions to the fund are distributed and what charities they support. When you put money or assets into the fund, you get a tax deduction right away—even if you do not direct your contributions to a charity right away. You can let your money sit in the fund to grow interest and only make contributions to charities when you feel strongly about supporting a particular cause.
Beware of Gift Taxes
Making large non-deductible gifts could trigger gift taxes and even contribute to your estate tax bill. If part of your financial plan involves giving money directly to individuals in need—including family members—talk to your advisors about the gift tax implications. As the donor, you will be responsible for taxes on any gifts above the annual exemption threshold ($16,000 for 2022). And, if you make many gifts above that annual threshold, the excess amount could trigger estate taxes later on.
Taxable gifts have to be added to the value of your estate when you die to determine your estate’s tax burden. For example, say you make a non-deductible gift of $30,000 to a family member while the annual exemption is $16,000. That $14,000 that exceeds the threshold is considered a taxable gift, and is counted toward your lifetime estate and gift tax exemption. The federal exemption is $12.06 million per person for 2022 but is set to drop to closer to $6 million starting in 2025. Some states also have their own thresholds that are much lower than the federal standard. In Massachusetts, where the estate tax threshold is just $1 million, many residents’ estates owe taxes. Any taxable gifts added to the estate’s value will drive the tax bill higher. Always talk to your advisors about gift and estate taxes before building any non-deductible giving into your financial plan.
Timing is Everything
Deciding what people and causes you want to support with your charitable dollars is entirely your choice, but how you time the giving of those gifts should be part of a larger conversation with your advisors. There are many possible strategies that can be used to minimize taxes through philanthropy, like accelerating your giving or even starting your own foundation to offset taxes during high-income years.
As you think about how to time charitable giving as part of your long-term financial plan, be mindful of the IRS’s annual limits on charitable contributions (60 percent of your AGI for cash contributions, and lower percentages for other types of property) and IRS annual deduction limits. When you meet with your tax planner, talk about carrying over charitable contributions to next year’s taxes if you are not able to deduct them this year.
Ultimately, building charitable giving into your long-term financial plan has both personal and financial benefits. But the specific tax benefits you see in any given year will be affected by what else is going on in your financial picture that year. Charitable individuals should always talk strategy with their advisors before making big gifts.
L&H’s tax team helps our clients support the causes they love in the most tax-advantaged ways possible. Whether you are about to make a substantial one-time donation or thinking about ways to build charitable giving into your long-term financial plan, L&H is here to talk strategy. Contact us today to learn more.