Giving money to charity isn’t just the right thing to do — it also comes with some nice bonuses, like the fact that it can make you happier and healthier. There are tax benefits (thanks, IRS!). And it can also have a ripple effect — research shows that if you give to a certain cause, your peers are more likely to do the same.
As a financial advisor on the Ellevest Private Wealth Management team, I spend a lot of time talking to clients about how they can invest intentionally to align their portfolios to their values, but that’s not the only way to help change the world. It’s worth being intentional with the way you donate your wealth, too.
How giving affects your tax bill
Typically, if you itemize your taxes (as opposed to claiming the standard deduction), you can deduct the charitable donations you make from your household’s taxable income. That lowers the amount you’d owe, up to a max of 60% of your adjusted gross income (AGI).
Even though the 2018 tax reform bill nearly doubled the standard deduction, overall giving continues to increase. And that's good news — not only for the people on the receiving end of larger donations, but also for the givers. Charitable giving can be a really useful way to manage your tax bill*. Here’s some info to help you in your year-end planning.
But first: The difference between “charitable contributions” and “gifts”
They sound the same, but they’re different to the IRS — and to your tax return.
A “charitable contribution” (aka a “donation”) is cash or assets (stock, property, etc.) you give to an organization that meets the IRS’s qualifications. There’s a handy tool from the IRS to help you check to see if your donation is deductible, but here are the key differences:
Your charitable contribution is typically deductible for the amount of the donation (or the fair market value of the asset).
Heads up, though: Donated stock is only deductible up to 30% of your AGI.
If you get something in return for your donation, like tickets to an event, you can only deduct the difference between the donation and the value of the thing you got. (Often this will be stated when purchasing the ticket, so keep your eyes open.)
If you’re donating an appreciated asset, like stock or real estate that increased in value since you got it, donating it allows you to avoid the capital gains tax that you’d have had to pay if you sold it (as long as you’ve owned the asset for at least a year) — and the organization you’re donating to won’t owe those taxes, either. That means you can donate the full value of the asset instead of a reduced, after-tax amount.
A “gift,” on the other hand, is when you give something to a person (as opposed to one of the qualifying organizations mentioned above) without expecting to get paid for its full value. (Basically, what we all think of as a gift. Like a pony.)
Gifts are not generally tax deductible.
A gift could be in the form of cash, assets, the use of an asset, or income from an asset. Also, if you sell something for less than it’s worth, or if you make a loan for little or no interest, that might count as a gift.
Your lifetime gift and estate tax limit is the amount you can give over a lifetime without the federal gift tax kicking in (as of 2019, the limit is $11,400,000). But gifts don’t count toward that lifetime exclusion if they’re under the annual limit of $15,000 per recipient; a married couple can give $30,000 per year per recipient. They could also not count if you give them in certain ways for education or medical costs, or if you give them to your spouse or a political org.
How to decide where to give
There are more than 1.5 million non-profits in the US alone, and they represent a huge range of interests — from helping domestic violence victims heal through yoga to closing the many gender money gaps.
As a first step, we recommend taking some time to define your “why” — your charitable mission. Consider your values and interests, and then list out some causes that align with them — things like “stopping climate change,” “fixing gender inequality,” or “promoting global literacy.”
Then, once you’ve got the “why,” you can start looking for the “who”: organizations that reflect those values. If you don’t have a local organization or cause you care about in mind, Charity Navigator, Guidestar, and Give.org are good starting points.
If you’re planning to deduct your contribution, check here to make sure the charity qualifies with the IRS. And if you’ll be donating assets other than cash, it might be a good idea to reach out to the charity to make sure they’ll accept them.
Ways to do the actual giving part
Direct charitable contributions
There’s always the option of giving cash, and that’s often the simplest way to go about it. Keep good records so that you can get the max tax deduction, if you’re itemizing: Any donations over $250 require a receipt from the receiving organization.
If the organization itself accepts complex assets, like stock or property, you can donate those directly, too. Non-cash donations over $500 require you to fill out a special tax form, and if your donation’s over $5,000, you’ll also need an appraisal of the asset. If it’s over $500,000, that appraisal will need to be handed in with your tax return.
And don’t forget, donating appreciated assets allows you to deduct their full market value and not pay capital gains taxes on the appreciation. That’s a common way to diversify out of a concentrated stock position.
Philanthropic investment tools
A donor-advised fund (DAF) is a simple fund that you establish through a 501(c)(3) called the “sponsoring organization.” Once you set up the fund, you make your donation and receive an immediate tax deduction. Then you “advise” (hence the name) the sponsoring organization as to which of their investment options you want to use until the money has been donated.
A particularly great time to establish a DAF might be when something happens in your life that could make your tax bill especially high, like the opportunity to sell your company or cash in on some stock options post-IPO. By creating and funding a DAF that year, you can manage your tax bill and set that money aside for charity — without having to decide exactly where you’ll donate it just yet.
Big liquidity event or not, if you aren’t quite sure which charity you want to give to yet, a DAF is a great way to separate tax planning from donation planning. DAFs also come with low fees, require as little as $5,000 to start, and allow you to pass record-keeping responsibilities to the sponsoring organization.
Private non-profit charitable foundations
Private charitable foundations generally require more of an initial investment than DAFs (hundreds of thousands plus vs. $5,000), and the stakeholders who set them up (or their designees) have to do all the administrative work, which can be time-consuming. But directors of private foundations get pretty much free range to decide what to invest the funds in and which organizations to donate to — even ones that wouldn’t normally get you a tax deduction (like non-501(c)3s, international organizations, and individuals).
Plus, with a private foundation, you can also make loans instead of grants if you want to provide an organization with the money it needs today but then collect it back to do good again down the line. And you can give family members compensation for helping you to run the fund — which you can’t do with a DAF.
When you put money or other assets into a trust, you give up your ownership of those things. The trustee — a fiduciary — takes ownership of the assets and then donates them to the trust’s beneficiary according to your instructions. (Btw, some private foundations are set up as charitable trusts, but not all trusts are private foundations.) Two common types of charitable trusts are charitable remainder trusts (CRTs) and charitable lead trusts (CLTs).
The nice thing about charitable trusts is that you can often give to charity and continue to collect investment income from what you’ve donated. Let’s say you donate stock. That stock’s (hopefully) going to keep paying dividends and gaining value while it’s invested.
With a CRT, you’d donate the stock to the trust, but you (or a person of your choosing) can still collect the income it generates. After a set period of time, whatever’s left in the trust is donated to the charity of your choice.
With a CLT, it’s the opposite: You donate the stock, then the investment income goes to the charity of your choice for a set period of time. And after that period of time is over, you (or the person of your choosing) get to keep what’s left.
Caveat: Trusts do take some time and money to create (you definitely need a lawyer and should plan to donate tens or hundreds of thousands in assets), and the tax implications are super complex. We definitely recommend talking to a tax pro if you think this might be right for you.
Alternatively, maybe you want to give a gift to family, friend, or neighbor in need. In that case, as mentioned above, you wouldn’t receive a deduction. But as long as it’s under $15,000 ($30,000 for married couples), it won’t count toward your lifetime gift and estate tax limit. And that’s a per-recipient cap: If you want, you can give $15,000 each to your daughter, your sister, your niece, your friend, and so on and so forth.
As we approach the end of the year, take some time to think about how giving can fit with your long-term financial goals. Yes, tax reform might discourage those who won’t itemize from giving (or maybe it won’t, time will tell) — but with the deduction limit for those who will itemize at 60% of your AGI, a little bit of planning can really help you make the most of your donations.
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Ellevest isn't a tax advisor, so we can't tell you what's best for your tax bill. This info is just meant to help you make an informed decision.
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Ellevest participates as an investment advisor in the Schwab Charitable program for donor-advised fund accounts that assists clients with their philanthropic goals. There is a minimum initial contribution amount for an Ellevest-managed donor-advised fund account and these accounts may not be suitable for all clients. Click here to read Schwab’s Program Policies for donor-advised funds, and click here to read Ellevest’s Form ADV.
You may or may not have noticed that we linked to forbes.com for information about why individual Holiday spending has dropped since 2013 and deductibles for donated stocks. Forbes (“Solicitor”) serves as a solicitor for Ellevest, Inc. (“Ellevest”). Solicitor will receive compensation for referring you to Ellevest. Compensation to the Solicitor will be $20 per membership activated. You will not be charged any fee or incur any additional costs for being referred to Ellevest by the Solicitor. The Solicitor may promote and/or may advertise Ellevest’s investment adviser services. Ellevest and the Solicitor are not under common ownership or otherwise related entities.
You may or may not have noticed that we linked to https://smartasset.com/ for information about spend limits on gifts before it is taxed. FYI, SmartAsset (“Solicitor”) serves as a solicitor for Ellevest, Inc. (“Ellevest”). Solicitor will receive compensation for referring you to Ellevest. Compensation to the Solicitor will be $10 per membership activated. You will not be charged any fee or incur any additional costs for being referred to Ellevest by the Solicitor. The Solicitor may promote and/or may advertise Ellevest’s investment adviser services. Ellevest and the Solicitor are not under common ownership or otherwise related entities.
You may or may not have noticed that we linked to https://www.investopedia.com/ two types of charitable trusts and the definition of AGI. FYI, Investopedia (“Solicitor”) serves as a solicitor for Ellevest, Inc. (“Ellevest”). Solicitor will receive compensation for referring you to Ellevest. Solicitor will be paid $3 for each email registration and up to $1,000 when an individual becomes a client. You will not be charged any fee or incur any additional costs for being referred to Ellevest by the Solicitor. The Solicitor may promote and/or may advertise Ellevest’s investment adviser services. Ellevest and the Solicitor are not under common ownership or otherwise related entities.
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