Did you know that 41% of charitable giving occurs in December? I like to think people are motivated by the season, but the fact that the tax year is coming to end probably has something to do with it as well, as evidenced by the fact that 10% of giving occurs on December 30th or 31st! Whatever your motivation, I applaud you for supporting charitable causes. I have given a significant percentage of my income toward charitable causes for years, and I think the act of giving not only helps others but helps me to be a better person. If you don't currently have a habit of giving to charities you support, I suggest you develop one, no matter what your income, debt, or net worth. Following are a few ideas for maximizing tax benefits for charitable purposes:
Tax Benefits for Charitable Donations
1. You Can Deduct Your Charitable Contribution on Schedule A
Although only 10% of Americans itemize, the percentage of doctors who itemize is far higher. At least once you get past the standard deduction, your donation will be completely tax-deductible. That means that for a physician with a 38% marginal tax rate (33% federal plus 5% state), a donation of $10,000 to a qualified charity will save her $3800 in income taxes. It is possible that these savings could be even higher if you are currently in a phase-out range. Obviously, this isn't a method of making money (since you're giving away more than you're getting back) but it does make it possible for you to donate more to a cause you support than you would otherwise be able to.
2. You Can Donate an Appreciated Investment Without Having to Pay Capital Gains Taxes
For example, if your $10,000 donation was composed of shares of a mutual fund for which you paid $5000, you would save $750-$1190 in capital gains taxes by transferring the appreciated shares to the charity, rather than selling them and donating cash. Note that if you have not owned the investment for at least one year, you only get to the basis amount as your charitable deduction, not the full value of what you donated.
3. You Can Avoid Estate Taxes
For 2021, if you have an estate larger than $11.7 Million ($23.4 Million married), or as little as $675,000 in some states, a donation to charity either prior to or at your death decreases the size of your estate. It is possible that you could save as much as 40% in federal estate tax and 20% in state estate tax. Combining the deduction for the charitable donation, the avoidance of capital gains taxes, and the avoidance of estate taxes, donating $10,000 could be the equivalent of spending just $2004 in a worst-case scenario!
Tax Benefits for Other Charitable Giving
1. Donor-Advised Charity Fund
There are three downsides to using a donor-advised charitable fund. The first is that you can only recommend donations to qualified 501(c)(3) charities. You can't just give money to the poor lady down the street or provide a scholarship to a deserving fellow. A private charitable foundation, not to mention a private individual, has a little more freedom in the charities it can give to. The second downside is that investments are a bit limited. Vanguard's offering, for instance, is composed essentially of Admiral shares of its popular index funds—Total Stock Market, Total Bond Market, Total International (and its components), Short Term Bond, Money Market Fund, and a few Fund of Funds made up of various asset allocations of these funds. Expense ratios range from 0.06% to 0.20%. The investments available at Fidelity are almost exactly the same, using their Spartan Index Funds. The third downside is the additional fee the donor-advised fund charges, 0.6% for the first $500,000 you have in the fund at either investment company.
2. Private Foundation
Another option is to start your own private charitable foundation. This requires a much larger donation ($500,000 is often suggested) to make it worth the additional costs and hassle of running a foundation. In return, you get more flexibility in your investments and in who can receive donations, such as individuals, businesses, and overseas organizations.
3. Charitable Remainder Trust
Daddy will you please plan your estate for me? Yes, and my business will even pay you for this photo to make it easier.
One way to combine a charitable impulse with an estate planning tool is to use a charitable remainder trust (CRT). With this type of trust, you put in a lump sum and take a tax deduction on it. This deduction will be less than the amount you donated as it must be discounted to its present value due to the fact that the charity won't get the money for a few years. You (or your spouse or a charity of your choice) then receive fully taxable income from the trust for a specified number of years or until you die, then the charity gets the “remainder”.
One estate planning reason that people choose to use a CRT is if they have a highly appreciated asset that produces no income, and they want some income. It is especially useful if estate taxes are an issue. For example, consider someone who owns a $10 Million property that he bought for $1 Million decades ago. If he sells it, he may owe as much as $2.14 Million in capital gains taxes. If he donates it to charity, and it is discounted down to a present value of $5 Million, then he gets a $5 Million tax deduction. The trust then sells the investment tax-free, invests in a reasonable portfolio, then provides the grantor an income of perhaps 5% a year ($500K) until his death. Keep in mind that the higher your desired income, the less of a current tax deduction you will get (and the less the charity will receive). There are a lot of other ways to structure a charitable trust. For instance, a charitable income trust (or charitable lead trust) pays the income to a charity until a specified date (such as your death) and then gives the remainder to your heir. If a trust is a consideration for you, then consult with a qualified estate planning attorney in your state.
What do you think? Do you donate money to charity? Do you do so directly, using a donor-advised fund, using a private foundation, or with a trust? Comment below!
Along the lines of charity, in 2001, the AMA said that the average Emergency Medicine physician provides $138,300 a year in EMTALA-mandated charity care. I’m not sure if “charity” is the right word for this sacrifice, but that is what they called it. Just some food for thought during this holiday season.
Nice post. An important topic.
However to take the scrooge side… I have often wondered why the government allows “Charitable donations” to be deducted. If you went to Best Buy to buy a $3000 TV they aren’t going to nock off $1000 of it because you decided to also give $3000 to the United Way. It seems like a pittance but there is a HUGE amount of lost tax revenue from this.
One could argue that the great good is being served but that really depends on who is getting the money. The ultra rich tend to donate to organizations that provide very little in the way of “common good”. Like 100 million dollars to fund a new football stadium for their alma mater. Completely tax deductible (and likely provided in installments to maximize deduction) but it certainly isn’t feeding and clothing the poor. Nor does it keep down college costs.
Just a different way of looking at it. That said, I always encourage charity but many would be quite shocked to find how little actually goes to their cause.
WCI,
Learning a lot from the site, thank you. I’m interested in using my portfolio gains to donate to a charity and while you’ve mentioned it a lot, I’m not sure of the logistics. I’d love a post with an illustration and some numbers. How do you chose which asset to donate? How much do you give relative to the gain it had? You describe it a as way to get rid of an appreciated asset but don’t you want to keep those for the long run?
Keep in mind that it only makes sense to donate appreciated shares if you would have made the donation anyway. Not only do you get the charitable deduction, but you also don’t have to pay taxes on any associated capital gains. You say “don’t you want to keep those for the long run” but that doesn’t make sense. If your goal is to keep your money, then of course don’t give it away.
As far as how you give it, every charity is a little different. But most of the big ones are going to have an account at Vanguard, Fidelity etc. So you fill out some paperwork, send it to Vanguard, and the shares are transferred to their account. They generally liquidate them right away, but that doesn’t matter to you.
I know I’m responding to a old post here. Do you have any resources that highlight the vetting process to choosing individual charities? My wife and I made a sizable donation to an organization a few years ago and found that the money is not being used exactly as we would have intended. While the goals and metrics are different, I would argue that buying individual stocks, businesses, or donating to individual charities require similar amounts of due diligence.
I’m not trying to push an agenda here, but it seems like there’s significant societal pressure to “donate to charity” but not enough attention to the donation process.
The more you donate (both in dollar amount and frequency) the more that starts to matter doesn’t it?
There are four charity rating organizations- CharityWatch, CharityNavigator, Guidestar, and BBB Wise Giving Alliance. I guess you could look at all four.
The Pease limitation was eliminated as of the 2018 tax year via the Tax Cuts and Jobs Act of 2017 (“TCJA”).
Good point. Will update.
When I [first] retired my uncle warned me “Don’t join any Boards!” I didn’t listen and understand his warning now- it can take a lot of time, meetings (pre Zoom) can disrupt travel and other plans, and when the organization has a big need for money they look to board members as deep pockets. That said, here’s how I give money to the kids down the street so to speak:
Basically joined a private foundation rather than founding my own: Joined a club that does charitable stuff locally as well as sending money to the worldwide group for larger projects. (Kind of like churches or synagogues.) Get to vote (even more so when I was a board member) on where our money goes. Money is deductible on taxes. We get to decide- shall we give this or that good local cause this money? Shall we pay for some of our crew (pre Covid) to go to one group and teach the kids cooking, take them to the Roller Derby, or give folks who might never get this otherwise a rose on Mother’s Day, or a spa treatment? Also choose to give directly so the group can decide on their own what needs the most funding. But our club gets to decide if we want to, and if we’re not going to help them reroof a home but will pay for a new playground that’s our choice.
No doubt with a larger mission (ours isn’t to ‘help poor people in need of money’, it’s more restrictive) you could urge and get voted on ‘let’s give Widow Jones a new septic tank for Xmas’- though of course with smaller money and more people with ideas of where to spend it might be tougher to achieve your personal charitable goals for donations to non 501c3 groups, but none of the fees a Donor-Advised fund charges (and only advance donations if you can get the group to vote solidly for keeping funds for future years).
I’m surprised you did not mention Qualified Charitable Distributions (QCD) from retirement accounts for those of us having to take Required Minimal Distributions (RMD). It reduces your taxible income, leading to a tax savings, and to a possible reduction in Medicare Income-Related Monthly Adjustment Amount (IRMAA).
Good feedback. That would be a good addition to this post. More on it here:
https://www.whitecoatinvestor.com/qualified-charitable-distributions/
Two comments to add to this finae article:
1) You need to also consider the state tax consequences of your contributions. For example, the State of Arizona offers state tax CREDITS (not deductions) for contributions to select organizations that provide educational and social services to the poor.
2) If you are making contributions overseas, they may not qualify for charitable contribution deductions. However, if you make that contribution through a US charity for the benefit of their programs in another country, they generally deductible.