Charitable giving is a personal choice you make throughout your lifetime. It feels good to be generous with the resources entrusted to your care. And making a plan for your charitable donations can be even more empowering.
Let's discuss seven of the choices you have for maximizing the impact and tax benefits of your giving.
In this article, we'll cover:
7 common options for charitable giving
You have a lot of options when it comes to how you donate to your chosen charities. From cash gifts to setting up charitable trusts, different methods of giving can serve different purposes and offer distinct tax advantages. Understanding these options is important to make your philanthropic efforts as impactful as possible—both for the recipient and for you.
Let's explore key methods for making charitable donations and the income tax advantages they offer. Keep in mind that some of these tax benefits only are available to you if you itemize deductions rather than claiming the standard deduction when filing your income taxes. A tax professional can help you decide which option will provide the maximum tax benefit.
1. Donor-advised funds
When you open a donor-advised fund (DAF), you contribute to a personalized fund earmarked for future charitable donations. You can contribute to the fund with gifts of cash, stocks, real estate, private business interests and more. The money remains in the fund and the money has the potential to grow until you decide on the charities that will receive the money. That can happen soon or years down the road.
One of the reasons donor-advised fund accounts are so popular is their versatility. You have the flexibility to change your mind about which charities to fund. You can support several charities with small or large gifts during your lifetime and after you pass away.
Tax benefits of donor-advised funds
Donor-advised funds allow you to claim an immediate deduction in the year the contribution is made. As soon as you make a gift to a DAF, the gift's fair market value (i.e., the amount given if it's cash or the appraised value of an asset like real estate) is considered a donation and may be eligible for a tax deduction in that tax year.
Any investment growth stays in the fund. It's not taxable income for you, and it increases how much you have available to give.
2. Charitable trusts
Charitable remainder trust
A
Charitable remainder unitrust (CRUT). With a unitrust, you can make multiple gifts of cash and publicly traded securities. Another type of unitrust allows gifts of more complex assets, such as real estate and closely held stock. Your income payments are calculated annually based on a set percentage rate and the value of the trust's assets.
Charitable remainder annuity trust (CRAT). An annuity trust is similar to a CRUT, but you fund it with a one-time gift of cash or securities. You can then receive ongoing fixed-income payments for your lifetime or a term of years.
Tax benefits of charitable remainder trusts
Charitable remainder trusts allow you to take an immediate deduction in the year the contribution is made based on the current value of the assets used to fund the charitable gift. Placing assets in the trust removes them from your estate, potentially lowering your estate tax liabilities. Contributing appreciated assets to a charitable trust also allows you to avoid capital gains taxes from selling those assets.
Charitable lead trust (CLT)
It's helpful to think of a
- Grantor trust. The remaining assets go back to you as the donor, or your spouse, at the end of the charitable payout period.
- Nongrantor trust. The remaining proceeds go to your family or others upon your death or at the end of the term of years.
Tax benefits of charitable lead trusts
The designation of the trust affects the tax treatment of both the donated assets and the income the trust generates.
- Grantor trust. The donor is able to claim an immediate charitable donation income tax deduction for the assets placed within the trust. The value of the deduction is the present value of payments the lead beneficiary is expected to receive for the duration of the trust term, subject to IRS limits. Any income generated by the trust is reported on the donor's personal tax return and taxed at the appropriate rate.
- Nongrantor trust. No immediate charitable donation income tax deduction is available for the donor when assets are placed within the trust. The grantor also does not incur a personal income tax liability on trust income. Instead, the trust files its own tax return and is liable for any income tax. The trust is able to claim a tax deduction for the value of any payments made, so it's not likely to have an income tax liability as long as it pays out the income earned during the tax year.
3. Charitable gift annuity
With a
Tax benefits of charitable gift annuities
With a CGA, you may be able to claim a tax deduction at the time of your original gift. The deduction is based on the amount that eventually will go to charity after all the annuity payments have been made. A portion of the annuity payments you receive may also be tax-free for a period of time based on your statistical life expectancy.
4. Qualified charitable distributions (QCDs)
A
The age at which you must start taking RMDs depends on when you were born:
- If you were born in 1950 or earlier: You must make RMDs at age 72.
- If you were born between 1951-1959: You can delay your RMD age to 73.
- If you were born in 1960 or later: Your RMD start age is 75.
You can transfer up to $105,000 annually from IRA assets to qualifying public charities. This amount will be indexed for inflation going forward.
Tax benefits of QCDs
When you donate via a QCD, the distribution from your IRA qualifies as a direct transfer and won't be included in your adjusted gross income, but it counts toward your required minimum distribution. By reducing your taxable income, QCDs could help bring you into a lower
Is a QCD right for you?
5. Gifting noncash assets
- Gifts of stock and mutual funds.
Giving stocks and other securities can be a potentially tax-efficient way to support causes you care about.
- Gifts of real estate. Some charities accept donations of real estate. The charity might use the property itself, but in many cases, it sells the property and uses the income to fund its mission. While donating real estate outright may be one giving option, other ways of giving may be more appealing if you want to retain the benefits of owning the property for as long as you're alive, or to generate income.
See the other options to make a charitable impact with real estate
Tax benefits of gifting noncash assets
If you own highly appreciated noncash assets, you may face a significant capital gains tax bill when you sell those assets. You generally receive a tax deduction for the full market value of long-term appreciated assets without incurring
6. Charitable life insurance
Tax benefits of charitable life insurance
Transferring ownership of an existing life insurance policy to a charitable organization allows you to take an immediate tax deduction. If you're still paying premiums on the policy, you can deduct those premiums as long as you make the payments. Plus, the policy is removed from your estate for estate tax purposes.
7. Naming beneficiaries & making bequests
You can
Tax benefits of naming organizations as beneficiaries
Your heirs may avoid paying income taxes on assets given, and the value of your estate will be reduced for estate tax purposes.
Work with a financial advisor on a charitable giving plan
If your income tax situation—today and in the future—plays a role in your charitable decisions, now is the time to begin planning. The avenues for philanthropy are diverse, each with its own set of advantages, considerations and tax consequences.
This is where the expertise of a financial advisor becomes invaluable. A professional who is well-versed in charitable giving can collaborate with your personal tax advisor to help you identify charitable giving tax strategies that align with your financial goals and philanthropic aspirations.
Connect with a