People give to charities for a variety of reasons. Sometimes it’s in response to a disaster to help those affected by it. Sometimes it’s to support a cause they strongly believe in. More often it’s to do all that and get a tax deduction. Unfortunately, the tax benefit of charitable giving has taken a hit recently since the standard deduction was increased.
The 2017 tax laws expanded the standard deduction dramatically so that individuals could deduct $12,000 and married couples could deduct $24,000 without proving any expenditures or contributions. Only taxpayers that could prove more itemized deductions, including charitable gifts, could deduct more which minimizes the tax incentive for charitable giving.
Nevertheless, for those with the means to give away enough to get a deduction or those with simply the desire to benefit charities, there remain a variety of useful methods for fulfilling that charitable giving motivation.
How Donors Choose To Allocate Their Money In Charities
The foremost methods are still direct gifts to charities but structured in a way to maximize the tax benefits. Those include making gifts in alternating years to increase the amount of the gift to help it meet the itemized deduction threshold or making a gift from an IRA if the donor is more than 70 ½ so that the contribution is never included in the donor’s taxable income. Those strategies, combined with other tools, can help taxpayers achieve their charitable goals while qualifying for tax benefits.
One such tool is a Donor-Advised Fund, such as that offered locally by the Community Foundation of Volusia & Flagler. A donor-advised fund allows an immediate tax deduction for amounts contributed while preserving the ability to recommend where those donations are ultimately allocated, whether it’s to a local charity or a national organization. The donations and recommended grants can all be handled through an online account which makes management more convenient.
Charitable Trusts and Private Foundations Benefits
On a larger scale, wealthier taxpayers may consider establishing a charitable trust which can either provide for an immediate charitable benefit for a period of time followed by a private benefit for the donor or her family or can provide for a retained private benefit for the donor followed by a gift to charity of what’s left at the end of the trust’s term. The income tax benefits of these trusts vary depending on how the trust’s income is taxed, so careful consideration should be given to the tax structure.
And for those large estates that want to benefit charitable causes without relinquishing control of the investments or distributions, the donor can establish a private foundation. Private foundations have significant tax benefits, but they also have significant administrative rules and restrictions which can result in penalties for those who violate them.
Recent changes in tax laws have left the impression that only the wealthy have a tax incentive to contribute to charitable causes, but with careful planning, those tax benefits can extend to many others with charitable goals. Those with the means and desire to make charitable gifts should consult with their financial and legal advisors to develop an appropriate plan.