Navigating the process of charitable giving can be both rewarding and bewildering. It feels good to support an organization or cause that you believe in, but it can also be difficult to make sense of the tax and financial implications of doing so.
With the right strategy, charitable giving can be done in a tax-efficient manner that helps to offset some of the cost of the donation. You don’t necessarily have to be wealthy to get the tax benefits, though certain avenues of tax efficiency are only worthwhile for larger donations. For example, if you don’t itemize your deductions on your tax return and you make a small cash contribution to a charity, chances are that you will not see any tax benefit of that contribution.
Our next few articles will discuss how to make the most of the tax benefits available as you support the causes that you care about in whatever way makes sense for you. But first, let’s set some ground rules.
Ground rules and resources
All of the charitable giving that we’ll be referring to is specifically to qualified organizations eligible to receive tax-deductible charitable contributions. Note that political contributions (whether to a specific candidate, a PAC, or a super PAC) are NOT deductible for tax purposes. The IRS has published a table that gives some useful guidelines and a tool to determine whether or not a gift to a specific organization will be tax deductible.
Tax implications of charitable giving
To dispel a commonly held assumption, tax benefits only partially offset the cost of charitable giving. When a billionaire gives a nine- or ten-digit sum to charity, you may hear the cynical remark that they’re only doing it to reap a huge tax benefit. While you can be sure they have professionals to help them get the most bang for their buck, the tax benefits only partially offset the cost of a large gift. So, whether you’re Mark Zuckerberg or Jane Doe, giving $100 to charity will never mean that you end up with MORE money than you used to have. It’s simply that the $100 that you give could be offset to some extent by the taxes you otherwise would have had to pay on that income.
Regardless of tax breaks, the impetus for charitable contributions should always be your own support for a specific organization, a cause, or a general desire to use your money for good. There’s no magical financial maneuver that allows charitable contributions to result in a net positive financial benefit to you. So, don’t let tax benefits be the foundational reason for your giving. Rather, let your desire to do good take the lead, then make sure that your giving is supported by a beneficial tax strategy so that your gifts are made in the most tax-efficient manner.
Our next article will dive into various ways of giving to charities so that you can devise a strategy that will maximize your impact while minimizing your tax liability.
If you have questions about your charitable giving strategy, please fill out our contact form and a team member will be in touch soon to schedule a consultation.