Fun fact: 70% of charitable giving in the US comes from everyday people — not corporations, not foundations — but individuals. That’s not so surprising when you consider that the act of giving comes with some nice bonuses, like the fact that it can make you happier and healthier. 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.
Recent tax reform on the giving front
… And then there are the tax benefits. November and December mark “giving season,” but this year, recent changes in the tax code might affect the amount people donate to non-profits. By one estimate, giving in 2018 could go down by as much as $21 billion — far fewer people are expected to itemize this year since the standard deduction has nearly doubled, so there’s less incentive to take advantage of the charitable donation deduction.
If you plan to itemize above the standard deduction, the max you can deduct for qualified charitable giving for 2018 is 60% of your adjusted gross income (AGI). And if you’re looking for ways to do good and keep your eye on that 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 the 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.
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).
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 2018, the limit is $11,180,000). 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. But not every charity is reputable. So how do you decide who to donate to?
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”: reputable charities that reflect those values. Charity Navigator, Guidestar, and Give.org are good starting points. Look for things like the credentials of the leadership team and how much of a tangible impact they’ve made in the past.
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. So 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.)
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, 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.
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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