Charitable giving offers an ideal way for you to support a cause which is close to your heart, and feel as though you are making a valid difference to a charity you genuinely believe in.
As well as giving you the chance to support a good cause, making charitable offerings can also be a savvy financial move.
What is a Charitable Donation?
Broadly speaking, a charitable donation is defined as a gift which is made to a charity, private foundation or nonprofit organization by a corporation or a private individual.
These are usually seen as cash donations, though there are other formats available such as real estate, services, assets, motor vehicles, and even clothing.
The Benefits Of Charitable Giving
For many nonprofit and charitable organizations, these donations make up the primary source of funding, and so are very important. They can also provide the donor with that “feel-good” factor, and help to make a genuine difference.
Some of the most significant benefits, however, are financial.
In many countries, a charitable donation made by an individual will provide a deduction on their income tax; an estimated 26 percent of givers will itemize a charity donation when completing their tax returns, and this can turn into substantial savings.
All itemized deductions are submitted with tax filings and are only valid if the donations are to eligible charities—those that qualify as ”charitable organizations’ under the tax codes. This means that any funds given to other parties or individuals will not qualify as tax-deductible.
Charitable donations can also be submitted in exchange for a service or good, such as entry to a charity ball, sporting event, dinner or performance.
To qualify as tax-deductible, the amount donated must be above the fair market value of the received benefit. For example, if the tickets for a charity football match are the same price as a regular ticket to a game, this will not be eligible.
The tickets would need to be priced higher than average, and the extra can then be claimed back as a donation.
Strict records need to be kept if you are planning to claim back your donations, including any receipts, as well as any written correspondence received from the organization featuring details such as the name, charity number, the date of the event, and the size of the donation.
Any donation which exceeds $250 must be recorded, and there may be supplemental and additional forms which must be completed and submitted with the tax returns.
Any non-cash items which are worth over $5,000 will need to be independently appraised to confirm the value, and the paperwork kept as evidence.
How to Give
Traditionally, when one thinks about charitable donations, the automatic assumption is to think of cash.
Cash is a popular method of donation, but there are other options available to you, depending on the amount you want to give, the type of estate you are representing, and the best way to donate.
There are several different ways you can give, and each has its benefits and disadvantages.
1. Donor-Advised Funds
Donor-advised funds and charitable gift funds are popular choices, making up more than 3 percent of all charitable donations in the USA. These funds allow you to donate a non-refundable amount in securities or cash to your chosen nonprofit enabling you to feel closer to the cause, and as though your donation is making a genuine difference.
You can also have a say in the way the funds are used and have the bonus of receiving the maximum tax benefit from the IRS.
You can also arrange for the funds to continue even after your death, meaning this is the perfect way to leave a lasting legacy.
2. Real Estate
Donating real estate to a charity is an ideal way to handle a property you are no longer using, and helps to avoid any unwanted taxes.
You can also arrange for the deeds to your home to be left to a charity of your choice after your death. This option has two benefits: one, you will lower the total taxes to be paid on your estate, and two, you can still benefit from your home while alive.
Passing your real estate to charity can also help you qualify for a tax deduction, and this can be lucrative, depending on the value of the property.
Simple and effective, money is the easiest way to help donate to your chosen charity.
You will be eligible for a tax deduction which is equal to the amount given, with any services or goods deducted. Some memberships to nonprofit organizations, such as zoos or art galleries, can be considered cash donation and treated accordingly.
This method is a super simple way to act as beneficiary and benefactor and absolves you of complicated tax or legal requirements.
If you are looking for tax-efficiency in your donation, stocks are the way to go.
These are long term investments designed to appreciate in value and are perfect for those looking to be smarter with their taxes. Because the assets are being donated, not sold, you will not have to worry about paying capital gains taxes.
The more appreciation, the more substantial your savings. You can also gain a tax deduction if your stocks have increased in value from the original cost; this is considered a donation, and you will be eligible for a suitable tax deduction which is equal to the full fair market value of your stock, for up to 30 percent of your adjusted gross income.
5. Pooled Income Fund
A pooled income fund offers an ideal way to help out a charity while still generating an income.
This option allows you to combine or ”pool’ together, many different securities, or combine securities and cash, increasing the size of the donation, and money will be paid out to you, as well as any other beneficiaries who have contributed assets.
When you die, the remainder of the fund is given to a charity of your choice.
This option may also make you eligible for a tax deduction, which will be equal to the amount of money the charity is expected to receive eventually.
6. Charitable Trusts
A charitable trust is another solid option, and there are two main types to choose from depending on which best suits your plans; a CLT (charitable lead trust) and CRT (charitable remainder trust).
A CLT is established through the transfer of your assets into the trust with a stream of income donated each year from these assets. This money is held in trust for a set period, after which any money left over will be disbursed to beneficiaries, or continue to be held in the trust.
This option has the benefit of offering an immediate gift tax deduction, which is based directly on the value of the income stream to the charity. This is a win-win option. The charity will receive a constant stream of money, and your heirs will be able to inherit without worrying about extortionate taxes.
A CRT acts similarly, with the main difference being the payment. In this option, the donor and any beneficiaries are paid first. They will receive their share of the income before the charity.
This option allows the charity to have a steady, regular cash flow, and the investors to diversify their portfolio and create an income.
Both a CRT and a CLT will require annual administrative management, but this is a small price to pay for the benefits.
7. Private Foundation
A private foundation can be a fantastic way for your family to be involved in your cause and is often started in memory of someone special.
They are set up as corporations or charitable trusts and have the power to offer grants to individuals while allowing you to remain firmly in control of any assets.
There are strict tax laws and regulations surrounding this type of donation, but it can be an amazing way to remember and honor a loved one while making a genuine difference.
8. Donating Assets
There is a range of assets which are eligible for a charitable donation—from life insurance policies and the contents of retirement accounts to physical belongings such as art and jewelry.
One of the key benefits of this action is that you will be eligible for a reduction in your income tax, but there is an additional bonus.
Any gifted item will not have to be recognized by your estate, and this can help to reduce the burden of the estate tax.
This option will also often include any assets which would usually be eligible for an income tax liability, allowing your beneficiaries to receive a good inheritance which is exempt for any extra taxing.
Physical, tangible assets can also qualify you for a tax deduction. This deduction is usually of equal size to the assets donated.
If you give an asset specifically related to that charity, for example, a painting to an art museum or gallery, you will be entitled to a larger tax deduction, so be smart when assigning items.