Charitable giving refers to the act of donating money or other assets to nonprofit organizations or private business interests that are dedicated to charitable causes. These organizations can include charities, foundations, religious organizations, and other tax-exempt entities.
There are many reasons why people engage in charitable giving. Some do it to support causes that are important to them, such as education, healthcare, social justice, or the environment. Others do it to honor a loved one, to leave a positive legacy, or to gain a sense of fulfillment or personal satisfaction.
Charitable giving can take many forms, including cash donations, gifts of securities, real estate, or other assets, bequests in wills or trusts, and even donations of time and services. In many cases, charitable donations can also provide tax benefits, such as deductions on federal income tax returns or reductions in capital gains tax and minimizing estate taxes.
Deductible Amounts
In most cases, the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction is limited to a percentage of the taxpayer’s adjusted gross income (AGI). The limitation on the deduction changes year by year as our politicians change their minds. Contributions that exceed that amount can carry over to the next tax year. If you donate property other than cash to a qualified organization to claim it as itemized deductions, you may generally deduct the fair market value of the property. If the property has appreciated in value, however, some adjustments may have to be made. Remember, you can deduct your donation only if you claim itemized deductions. However, there are many other tax benefits for being a generous person.
Limitations on charity given
In order to claim a tax deduction for charitable contributions, taxpayers must meet certain requirements. First and foremost, the organization to which the contribution is made must be an officially recognized 501(c)(3) entity. This means that the organization has been approved by the Internal Revenue Service (IRS). Additionally, taxpayers must obtain written acknowledgments from organizations they donate to that include their name, the date of the contribution, and a description of any goods or services received in exchange for the donation. Keep these requirements in mind as you make charitable donations if you want to reduce your taxable income.
Find Out about our Individual Tax Services in the U.S.
Foreign Organizations
Individuals wishing to donate to organizations that advance charitable causes around the world can simply make direct international donations to those foreign organizations. However, as noted above, only donations made to tax-exempt organizations approved by the IRS are deductible. The organizations listed in Tax Exempt Organization Search with foreign addresses are generally not foreign organizations but are domestically formed organizations carrying on activities in foreign countries.
What is charitable planning?
Charitable planning is the process of designing and executing strategies to maximize charitable giving while minimizing taxes. It involves developing an overall plan for donating money or property that maximizes the tax benefits associated with donations while accomplishing the donor’s philanthropic goals.
Charitable planning can involve a variety of strategies explained in this article, some with tax implications with the main goal to maximize your charitable deductions and minimize your taxable income. Charitable planning will not only help you to reduce your income tax, but it does help to reduce capital gains, gift tax and estate tax consequences.
Charitable Giving Strategies
Charitable giving strategies are designed to maximize the tax benefits associated with donations while achieving philanthropic goals. These charitable tax strategies can include donating cash, stocks or other assets, bequests in wills or trusts, and even donations of time and services. When making a donation, it is important to ensure that the organization is an officially recognized 501(c)(3) entity as only these organizations will qualify for a tax deduction. There are several strategies available to taxpayers who wish to maximize their charitable deduction on charitable giving. Here are some of those charitable giving strategies:
If the numbers add up, itemize
If the donations you are planning on making will total more than the standard deduction, itemizing is a great way to maximize the tax benefits of your charitable giving. When itemizing deductions, all allowable expenses must be reported on Schedule A of Form 1040. These expenses can include any cash contributions made to qualified organizations, mortgage interest payments, state and local taxes, as well as other approved expenses. Additionally, when itemizing, taxpayers can deduct the full fair market value of the donated property. This means that if you donate a piece of property to a qualified organization, for itemized deductions you are allowed to deduct the full fair market value of that property limited to a percentage of your adjusted gross income (AGI).
Bunch your charitable gifts
If the numbers don't add up, bunch your deductions. This strategy is known as “bunching” qualified charitable distributions, or donations into a single tax year. This technique allows individuals to itemize deductions in one year. When done correctly, bunching your charitable tax deductions can reduce taxable income and maximize charitable giving benefits.
Donor-advised fund
Another great way to minimize taxes on charitable giving is to use a donor-advised fund. A donor-advised fund allows donors to make contributions and receive an immediate tax deduction. The money can then be invested in the donor-advised fund, allowing it to grow over time. Donors can then recommend grants from the fund at any time, allowing them to achieve their philanthropic goals while taking advantage of a charitable deduction associated with donating. When you contribute to the donor-advised fund, you are generally eligible to take an immediate tax deduction. After death, your donor-advised fund can continue carrying on your charitable giving legacy and the donor will incur no estate tax or gift tax within the fund.
Charitable remainder trusts
A charitable remainder trust (CRT) is a great way for individuals to donate money and receive immediate income tax relief. A charitable remainder trust allows donors to transfer cash or other assets into a trust that pays the donor an income stream for some time and ultimately the remainder interest is distributed to charities. The resulting donations are tax-deductible, and the donor can enjoy peace of mind knowing their donation will benefit those in need while receiving income on the asset for the specified period. These trusts are usually funded with highly appreciated properties or high-income-producing properties.
What are the benefits of a charitable remainder trust - CRT?
A charitable remainder trust can act as a tax deferral. If the CRT sells a highly appreciated asset, there is no immediate capital gains tax. Instead, the taxable gain is held inside the CRT (exempted from income tax) and taxed as capital gains tax to the grantor over time as distributions are made. The CRT helps the taxpayer to plan major donations to charities, allows for the deferral of income taxes on the sale of appreciated assets transferred to the trust, and provides a predictable income for life or over a specific period.
Charitable Lead Trusts
A charitable lead trust (CLT) is an estate-planning tool that allows donors to make substantial gifts to charity while minimizing the taxes on the transfer of assets. This arrangement offers tax savings for both the donor and recipient, making it a great way to give charitably while still benefitting from tax advantages. With a CLT, you can donate a large amount of money or other assets to charity while maintaining control over how your donations or appreciated noncash assets are used and when they are dispersed. The donor retains ownership of the asset during the term of the trust and may be able to pass along additional wealth at death without having donors' assets subject to estate taxes.
What are the benefits of a CLT?
A Charitable Lead Trust can be used to transfer property to the grantor's children at a discounted transfer tax rate. The taxable gift equals the present value of the remainder interest. If structured as a grantor trust, the grantor receives a tax deduction equal to the present value of the income interest going to charity in the year of contribution to the CLT. The income of the CLT will be attributable to the grantor-owner during the term of the CLT and no subsequent charitable deduction will be permitted to the annuity or unit trust payment each year to charity.
You might also be interested in Gift Tax Planning and Compliance
Donate highly appreciated assets
When you give highly appreciated assets such as stocks, bonds or mutual fund shares directly to a charitable organization, you can avoid paying capital gains taxes and receive an itemized deduction for the full value of the asset. This is an especially advantageous giving strategy if you have owned the asset for less than one year, as short-term capital gains are taxed at a higher rate than long-term capital gains. Additionally, donating appreciated securities may provide more tax savings than donating cash, due to the double deductions – one for the donation amount and one for avoiding capital gains tax on the appreciation. Yes, you can reduce your taxable income and minimize your capital gains tax by donating highly appreciated assets.
Give more by donating retirement assets
When making a charitable contribution, it’s possible to donate part or all of your retirement assets. Donating these assets can provide tax advantages in two ways: 1) an immediate income tax deduction for the donor; and 2) avoidance of income taxes that would have been owed if the money had remained in the retirement account. One additional benefit is that donating retirement assets can help reduce your estate taxes by reducing the size of your taxable estate. However, it is important to keep in mind that withdrawals from IRAs and other retirement accounts prior to age 59 ½ may be subject to a 10 percent early withdrawal penalty as well as ordinary income taxes. If you are considering donating your retirement assets, consult with a financial advisor and/or tax professional.
Private foundations
A private foundation is a charitable organization that provides grants to other organizations and individuals. It can provide benefits for the donor's specific tax situation, and offer an attractive way to make charitable donations while maintaining control over how those funds are used. The main benefit of establishing a private foundation is that it allows donors to direct their philanthropic efforts and target specific causes, communities or organizations they want to support. A private foundation often has lower overhead costs than a public charity and offers more flexibility in how it operates. Some of the most common types of foundations include family foundations, corporate foundations, community foundations and donor-advised funds.
What are the benefits of a Private Foundation?
They allow donors to take advantage of greater flexibility when deciding where their donations go. They can also take advantage of various tax advantages, such as the ability to deduct charitable contributions from their taxes, and they may be eligible for other benefits, like reduced state taxes or estate-tax deferral. Additionally, they often have lower overhead costs than public charities.
Setting up a private foundation allows donors to maintain control over how their donations are used and who receives them. This can provide a great deal of satisfaction knowing that one's philanthropic efforts are truly making a difference in the lives of those served by the organization or cause supported by the foundation. They also provide an excellent way for families to establish and pass on values across generations through shared giving strategies. These foundations offer donors creative ways to give, while also providing financial support to the causes and organizations they are passionate about.
Record keeping and documentation
These foundations are required to maintain detailed records of all transactions and must provide a donor acknowledgment letter for any gift over $250. This is an important step in ensuring that the foundation complies with IRS regulations, and donors should keep these acknowledgments for their own tax purposes. Additionally, the foundations must comply with additional reporting requirements depending on the size of the foundation. Depending on the size of your donations, you may need to attach IRS Form 8283 or file an informational return (Form 990-PF). It’s important to consult with a qualified accountant or attorney before taking any action when it comes to creating and operating a private foundation.
Tax Compliance for Charitable Organizations
Tax compliance is a critical issue for charitable organizations, both public charities and foundations. Charitable organizations must meet the specific requirements of the IRS in order to maintain their tax-exempt status. This means that they must file the proper forms with the IRS on an annual basis and provide detailed records of all transactions. Additionally, nonprofit organizations must be aware of any state or local taxes and regulations related to their activities, such as tax reporting or fundraising regulations. All donated funds should also be tracked closely, as any mismanagement or misuse of these funds can result in penalties from the IRS.
Conclusion
Charitable donations can be a great way to give back and receive tax benefits, but it is important that donors understand the complex regulations associated with them. Donors should document all transactions for their own records as well as those of the charitable organization in order to maximize any potential tax savings. Additionally, private foundations must comply with detailed reporting requirements from the IRS depending on their size. Charitable organizations also need to stay compliant by filing required forms annually and tracking donated funds properly. By taking the charitable tax strategies presented here into consideration when gifting your assets, you make a positive philanthropic impact while minimizing your taxes.
How H&CO can help you
At H&CO, we have a team of experienced tax professionals who can help you plan for and comply with complex charitable giving tax laws and regulations. Our international tax advisors can advise on the best way to make donations in order to minimize your tax liability, while still ensuring that you achieve your philanthropical goals. We also offer comprehensive services such as preparing and filing income tax returns, gift tax returns, estate federal tax returns as well as state tax returns. Our experienced team of international tax advisors can help with all your tax planning and compliance needs.
H&CO's bilingual trusted CPA Tax Advisors have been helping high net-worth individuals, family offices with significant income, business owners, investors, global families, and foreign individuals with their gift tax needs, for over 30 years. You can talk to our CPAs in one of our offices near you in Miami, Coral Gables, Aventura, or Fort Lauderdale. Our international CPAs are ready to assist you with all your income tax planning and income tax preparation needs. We are ready for a successful engagement on this side of the world!
If you are interested in some of our other global tax services, take a look at our business tax services or international tax services.
