The Tax Benefits of Charitable Giving - Aspiriant Wealth Management

The Tax Benefits of Charitable Giving

As the light at the end of the COVID-19 tunnel gets brighter, it’s helpful to take a step back to see what we can learn from an incredibly stressful and scary time. Even through the darkness, the pandemic brought out the best in many people who wanted to help those struggling through unprecedented circumstances.

Despite the economic downturn, charitable giving by Americans hit an all-time high in 2020, with donations totaling nearly $500 billion, according to the Giving USA report. Last year, we highlighted some charitable giving trends that emerged early during the pandemic. It’s clear that many people responded to a time of uncertainty and fear with generosity of both their time and money.

During a Money Tales interview, our guest Rabbi Ryan Bauer spoke about the personal benefits of charitable giving. There are many ways to support the causes and organizations we care about most, beyond simply giving our wealth. We can volunteer our time and lend our skills for cooking, caregiving, tutoring, fundraising, etc. to an organization.

To encourage donations to non-profit organizations, the IRS offers several personal income tax benefits for charitable giving. However, there are a few nuances to be aware of to make sure your contributions qualify for favorable tax treatment. Below, are some of the different ways to give, as well as key rules to keep in mind to maximize the tax benefits and make the most of your charitable gifts.

Gifts of cash

The most straightforward way to donate is by giving cash to a charitable organization. The simplicity of this approach is appealing to many people, and most charities even accept donations via credit card on their websites or allow you to donate via text. The simplicity of cash gifts, however, can come at a tradeoff for some people. As we discuss below, there may be more tax-efficient ways to donate rather than by a direct gift of cash.

Gifts of things

When donating items of value to a charity, you can generally deduct the fair market value of the gifts on your income tax return (if you itemize), resulting in a lower tax bill. The law allows us to take an income tax deduction for the donation of many types of property, including but not limited to the following:

  • Art
  • Cars
  • Musical instruments
  • Clothing
  • Athletic equipment
  • Furniture
  • Real estate

The charity can either use these items directly or sell them and repurpose the proceeds. If the amount of the property you’re donating is $5,000 or greater, you’ll need to get a qualified appraisal. Also, special rules may apply if the donated property is unrelated to the charity’s function or is sold by the charity within three years.

Gifts of appreciated stock or other capital gains assets

One of the most attractive things to donate from a tax perspective is appreciated investments that you have owned for more than one year. When you donate appreciated investments, you get to deduct the value of the investment on the date of the gift, and you don’t have to pay any tax on the underlying gain.

Let’s say you bought a stock for $10,000 in 2018, and it’s now worth $25,000. During this time, its value has gone up by $15,000. If you sold that stock, you’d owe long-term capital gains on the proceeds, which could be up to 23.8% when the Medicare surtax is included. But if you instead donate the appreciated stock directly to a charity, you can take a $25,000 charitable gift deduction, and you don’t have to pay tax on the $15,000 gain. That’s a double win in terms of tax savings! (Because qualified charities are tax-exempt organizations, they don’t pay taxes on the gains when they liquidate the stock.)

When you donate a publicly traded stock, it’s easy to determine the value of your gift; you just look at the price the stock was trading at on the date of the gift. But if you donate stock in companies that aren’t publicly traded or contribute other illiquid, non-public assets, such as art or land, the process is a bit trickier — but not impossible. Read my colleagues’ fathom post for tips for giving illiquid stocks and other non-publicly traded assets for more information.

Be strategic and mind the tax details

There are a few things to consider when assessing the tax benefits of a donation. First, the dollar value of the charitable deduction may be limited by your adjusted gross income (AGI) and/or by the type of charity you’re giving to. But it’s worth noting that Congress raised the limit on cash gifts to public charities (but not other types of gifts) to 100% of AGI for 2020 and 2021 in response to the COVID-19 pandemic.

You also may want to be strategic about the timing of your gifts. To benefit from charitable gift deductions, the sum of all your itemized deductions — which, in addition to charitable gifts, include things such as mortgage interest payments and state and local property taxes — would need be greater than the standard deduction you could alternatively take.

In 2021, the standard deduction is $12,550 for a single person and $25,100 for a married couple. The size of the standard deduction, as well as the $10,000 limit on deductions for state and local taxes, mean that some charitable givers may benefit from using a “bunching” strategy. Under this approach, donors concentrate their anticipated gifts in one year, itemize their deductions that year and then take the standard deduction in the other years.

This is just one strategy to consider when thinking about maximizing the impact of your charitable gifts. We highly encourage you to discuss your options with your financial advisor or tax professional in advance so that you know how to best optimize the gift for tax purposes.

Aligning your giving with your values

While there are clearly tax advantages to charitable donations, some of the largest benefits can be more personal. Giving to charity allows you to have a direct impact on causes that you believe in deeply. While much has changed since the start of the pandemic, it’s helpful to remember that some things will never change. We can always positively influence the world around us to shape both the present and the future. Charitable giving is one way to make that happen.