Your guide to tax deductions on charitable donations

Like many people, you may have a desire to use your money in a way that can make a difference to your community or the causes you care about. Developing a charitable giving strategy can help you achieve the meaningful impact you envision and take advantage of tax benefits along the way.

Some giving approaches are simple; others are more sophisticated. Each comes with different tax implications. Consider these strategies to help you maximize your charitable tax deductions.

Direct gifts of cash

These can be made by check, credit card or even payroll deduction through your employer. If you itemize deductions, gifts of cash to qualified public charities can be deducted in an amount up to 60% of your adjusted gross income (AGI) in a given year. If donations are made to private foundations (such as a family foundation), the annual limit is 30% of your AGI.

Small donation amounts each year might not create enough of a deduction to give you a tax break under the current tax law. If you plan to donate the same amount of money each year, consider “bunching” donations into a single year so you can itemize and claim the deductions.

Gifting appreciated assets

If you hold publicly-traded securities (stocks) or other types of assets that have appreciated in value, you may face a significant capital gains tax when you sell the asset. An alternative is to gift the appreciated asset to a qualified charity. This allows you to avoid paying the capital gains taxes you’d likely need to pay if you sold the asset for a profit.

For gifts of appreciated publicly-traded securities, you can claim a tax deduction equal to the fair market value of the asset. The tax deduction cannot exceed 30% of your AGI for gifts to a public charity or 20% of your AGI for gifts to a private foundation.

Gifting other types of assets

Other assets that can be gifted include:

• Real estate
• Life insurance policies
• Capital assets such as land, buildings, machinery, and appreciated closely-held securities that you’ve owned for at least one year

If your gifts exceed the tax deduction limits in the year the gift is made, you can carry the unused portion of the deduction forward up to five years. You can claim the unused deductions to the extent they fall within your deduction limits for each of those years until the entire amount has been exhausted.

Charitable remainder trust

A trust can support your favorite cause and provide financial benefits for you or your family at the same time. One example is a charitable remainder trust. This irrevocable trust allows you to make a charitable gift but retain a taxable income stream (determined by the IRS) generated by those assets for a set number of years or for life.

When the term ends, remaining assets are passed on to the designated charities tax-free. A portion of the contribution to the trust is tax deductible.

Charitable lead trust

This type of irrevocable trust is designed as a wealth planning technique to transfer assets to family with a discounted value, or to reduce taxes on the grantor’s estate after their death. The trust first pays income to a charity (based on a rate determined by the IRS) for a set number of years. When the term ends, the remaining value of the assets is directed to designated non-charitable beneficiaries.

Qualified Charitable Distribution (QCD)

When you’re 70 ½ or over, you can donate up to $105,000 (adjusted yearly for inflation) from your traditional or Roth IRA directly to a qualified charitable organization. If you’re subject to required minimum distribution (RMD) rules (applicable after you reach age 73), a direct transfer from your IRA allows you to avoid having to pay income tax on the RMD and gives the assets directly to the charity.

Private foundation

An individual or family can establish a non-profit entity that is designed to direct donations or gifts to other charitable organizations. The foundation directors retain control over how donations are invested and when and how the gifts are ultimately directed.

There are limits on claiming tax deductions (see rules for private charities in the chart above) and at least 5% of the foundation’s assets must be distributed to qualifying charities each year. The foundation must comply with several administrative requirements, including filing an annual tax return.

Donor-advised fund

A less complex option than a private foundation is a donor-advised fund. You, as the donor, make an irrevocable contribution to an existing 501(c)(3) organization, which is held and invested. You can make recommendations as to which charities you would like your donation to support. You’ll receive a tax deduction in the year that the contribution is made (see rules for public charities in the chart above). The assets can be distributed to charities over many years.

Tax planning is critical

Careful planning can help you maximize the tax benefit of your charitable giving strategy. Consider working with your tax, legal and financial professionals to determine the most efficient assets, timing, amount, and forms of the gifts you’d like to make.

Learn how U.S. Bank can help you and your family develop a charitable giving strategy.