Expanded Lesson
10 min read
Introduction to Charitable Giving
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Philanthropy and charitable giving, once thought to be reserved for the wealthy and the elite, has become a common theme across much of today’s society. Charitable organizations fill a vital niche in our communities. They serve the public and support initiatives that may not be covered by the public or private sector and help create thriving societies and economies. Charitable giving can be both personally and financially rewarding, which is why it’s important to know what your options are so your gift has the biggest impact.
Lesson Notes:
- Charitable giving is vital to sustaining non-profit, charitable organizations and can be used as a part of retirement, estate and tax planning strategies.
- The tax-deductibility of gifts (cash, investments and other assets) is dependent on the type of charitable organization.
- There are a variety of ways you can support charitable organizations to fit any budget.
LESSON CONTENTS
Why is charitable giving important?
After the Tax Cuts and Jobs Act passed in 2017 (TCJA), some thought that charitable donations would decrease because of the higher standard deduction. They thought the higher standard deduction would cause fewer people to itemize their deductions, and therefore reduce the financial incentives related to making charitable donations (charitable tax deductions), ultimately causing fewer people to donate.
What we saw, however, was quite the opposite. Charitable donations rose by 5.1% in 2020 for a total of $471.44 billion. People give for a variety of reasons including:
- Religious.
- Social responsibility.
- Financial incentives.
- Supporting good causes.
- Giving back to people in situations you used to be in.
- Leaving a legacy.
Whether a person aims to support their local community or change the world, more people are putting their dollars and time behind causes they believe in.
Do I need to be rich to donate?
The great thing about charitable giving today is that there is a variety of giving options that lets anyone support their communities, charitable organizations and causes they believe in. This can be done directly through gifts of cash, property or investments, or indirectly through conscious capitalism and making purchases through channels that support civic causes.
Many charitable organizations rely on small, regular donations to support the programs they run. Even if you feel like the amount you can contribute is small, don’t underestimate the power of your donation. These types of gifts add up and make a huge impact on the organizations you support!
Understanding charitable organizations
The terms non-profit or not-for-profit are often used interchangeably with charities and charitable organizations. However, just because an organization is a non-profit, it doesn’t mean that it’s automatically a charity. Most non-profits are designated as a 501(c) under the Internal Revenue Code (IRC), which means that they are exempt from having to pay federal income taxes. Being exempt from federal income tax is not the same as being a charity. For example, a pension fund may be a non-profit organization, but you wouldn’t say it is set up for a charitable cause.
Why is this important? Well, if you want your donation to be tax-deductible or as a planned giving tool for financial planning, you’ll have to make sure it’s going to a qualified charity. Generally, qualified charities are designated as 501(c)(3) organizations under the IRC. The IRS defines 501(c)(3) as charitable organizations that:
- Are organized and operated exclusively for exempt purposes (charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals).
- Must not be operated for the private interests of any individual or shareholder.
- May not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.
To check to see what designation a non-profit has, use this IRS database.
(Select “Pub 78 Data” in the “Select Database” dropdown menu. This allows you to filter by deductibility code, which shows the type of charitable organization and its corresponding tax deduction.)
Common types of 501(c)(3) charitable organizations
Typically, 501(c)(3) organizations fall into three main categories: public charities, private foundations and private operating foundations.
Public charities
When most people think of charitable non-profits, they are probably thinking of public charities. These organizations have a variety of missions and usually run programs to serve their respective communities. Churches and other religious organizations, community foundations, supporting organizations, certain government entities and other benevolent organizations can all be classified as public charities. Public charities must meet the “public support test” which requires one-third of its donated revenue to come from broad public support, rather than from one particular family, individual or organization.
Private foundations
Private foundations, also known as non-operating foundations, are organizations that do not run charitable programs or activities. They are not required to receive broad public support and therefore, may be funded by an individual or small group of people. Private foundations usually support philanthropic efforts by distributing assets to other charities in the form of grants.
Private operating foundations
Private operating foundations, the least common 501(c)(3), combine aspects of both private foundations and public charities. They are governed in a way that is similar to private non-operating foundations and are required to use 85% of their earnings for their programs. Like public charities, these organizations actively run programs, rather than writing grants for other charities.
Are my donations tax deductible?
While giving for the sake of giving is encouraged, there are also financial benefits like tax deductions that can not only reduce your taxes but could also allow you to donate more to the charity.
To deduct a charitable contribution, the donation must be made to a qualified organization like a 501(c)(3) and must be itemized on your tax return. The tax benefit you receive for your deduction will vary depending on what type of organization you’re donating to and what type of asset you’re donating. The total deductions you claim per year may be capped at a certain percentage of your AGI. However, if you find that you’ve donated more than that limit, you can roll over some of your deductions to the next year as well.
|
Donation Type |
Public Charities and Private Operating Foundations |
Private Non-Operating Foundations |
|---|---|---|
|
Cash Amount deductible: % of AGI limitation: |
Donated amount 60% |
Donated amount 30% |
|
Ordinary Income Amount deductible: % of AGI limitation: |
Donated amount 50% |
Donated amount 30% |
|
Short-term capital gains Amount deductible: % of AGI limitation: |
Cost basis 50% |
Cost basis 30% |
|
Long-term capital gains (investments and real estate) Amount deductible: % of AGI limitation: |
Fair market value 30% |
Cost basis 20% |
|
Long-term capital gains – election (investments and real estate) Amount deductible: % of AGI limitation: |
Cost basis 50% |
N/A |
|
Tangible Personal Property Amount deductible: % of AGI limitation: |
Current reasonable value 50% |
Current reasonable value 20% |
Information current as of Dec. 2020 – For complete charitable deduction guidelines visit IRS Publication 526: https://www.irs.gov/forms-pubs/about-publication-526
If you plan to put restrictions on your donation, meaning that you want the organization to use it for a certain purpose or program, you may see reduced tax deductions. Generally, the IRS gives more favorable tax treatment to charitable contributions that are made “to” the charitable organization, rather than “for the use of” a certain purpose.
For tax filing purposes, try to save donation acknowledgments and/or receipts, especially if you donated in cash. While it’s good to know the different deductibility rules, consider using a tax professional to help itemize your charitable contributions and make sure you’re deducting the correct amount.
How can I donate to charities?
Traditionally, single lump sum donations have been a standard method of giving. Maybe you write a check annually to your favorite local non-profit or donate at a fundraising event. If that doesn’t suit you, there are other charitable giving strategies you might consider. No matter what your income or budget is, there are ways to give that can help you fulfill your philanthropic goals.
Pooled giving
Some people don’t donate because they feel like their contributions are too small to make a difference. Small charitable gifts can be pooled together with donations from other individuals to make a sizable contribution. Pooled giving can come in the form of structure tools like pooled income funds (a form of charitable trust), 501(c)(3) giving circles or be as simple as pitching in with some friends or a community group to make a combined donation to a charitable cause. The idea is to gather support for the cause or organization because a handful of smaller donations can have just as much impact as one larger one.
Recurring donations
Recurring donations are a great way to support your favorite charity or non-profit. These donations are made in regular intervals, usually monthly or quarterly. Recurring donations can be in the same amount as some of your other monthly subscriptions. It provides the charity predictable revenue they can rely on, which can be a huge benefit to organizations that normally have to apply for grants for funding. Check to see if the non-profit you’re considering has a system that can help you make automatic, recurring contributions.
Planned gift
Planned gifts are usually large gifts that have been incorporated into a donor’s financial, retirement or estate plan. These gifts may come in the form of a bequest, life insurance, cash, investments or other property. Planned gifts can be powerful because they, if done correctly, have the opportunity to give a gift that has a larger impact and leaves a legacy.
Stretch your donation
The world is focused on giving now more than ever. This can be seen in the multitude of programs that reward those who want to give back to charitable organizations. Look for ways in your day-to-day life that can help you further your giving goals. If you shop online, programs like Amazon Smile make small contributions to a charity of your choice for items you purchase. Your employer may have a matching program for donations to charitable organizations. Certain credit cards even give you rewards points or cash back for charitable donations. The point is, even if you don’t have a lot of extra money to give, you may still be able to support charities by doing things you’re already doing.
Whether your gift is big or small, charitable giving is something you should learn about not only for the benefit of your community and society but also for your personal financial fulfillment.
PLEASE NOTE: Information provided is for educational purposes only and should not be considered recommendations or advice. Please consult the appropriate financial, tax, or legal professional to determine whether strategies presented in this article are appropriate for your situation.
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