Financial Benefits of Charitable Giving and How To Maximize Them

Financial Benefits of Charitable Giving

The primary purpose of charitable giving is to support a worthy cause. However, charitable donations can also have personal financial benefits. Here are some of the potential financial benefits of charitable giving and strategies for maximizing those benefits.

Reduce Your Taxable Income:

If you itemize your deductions, up to 60% of your adjusted gross income can be offset by donations to public charities and up to 30% for donations to some types of private organizations. Donations that exceed those limits can be carried forward for up to five years. To be eligible, the donation must be made to an organization with a 501(c) tax-exempt filing status.

Your contributions can be cash, securities, real estate, personal property or volunteer hours. The restrictions on how much you can deduct can vary for different types of donated property. In the case of volunteer hours, you may also be able to deduct an expense for mileage driven as part of your volunteer efforts. It is generally best to keep detailed records and ask for receipts so that you can prove your deductions are legitimate should you be audited.

Lower Your Estate and Capital Gains Tax:

If you anticipate that your estate will exceed the tax exemption limits, you can reduce the tax burden on your estate by donating some of your assets to charity. You can also avoid capital gains taxes on stocks by gifting those stocks to an eligible charity. By doing this, the charity will receive the full value of the stock without being obligated to pay capital gains and you will not have to pay the capital gains tax you would have paid if you had sold the stock and then donated the proceeds.

Maximize Your Benefits:

To maximize both the impact of your charitable giving and your financial benefits, you may want to consult with your financial advisor. With your advisor’s help, you can determine which strategies are the best fit for your financial and philanthropic goals. Some strategies to consider are:

  • Set a specific goal for total charitable donations for the year.
  • Evaluate all the types of donatable property you have to see which can generate the largest charitable impact while also generating the greatest financial benefit to you.
  • Determine whether a private foundation or donor-advised fund makes sense for you and your family.
  • Consider distributing all or a portion of the minimum distributions from your retirement accounts to charitable causes.
  • Evaluate the benefits of income-generating donation vehicles such as a charitable remainder or charitable lead trust.

Do Your Research:

Regardless of the potential financial benefits, it may be wise to verify that any organization you are considering donating to is a valid charitable organization in good financial condition. Unfortunately, not all charities are legitimate and some that are, don’t manage their finances well or allocate as high a percentage of donations to the causes they are supposed to be supporting as you might like. If too much of the funds they receive go to administrative costs or they end up shutting their doors because of financial distress, your donations may go to waste. It can also be a good idea to verify that the donations to the organization you are considering are eligible for tax deductions. Additionally, to ensure your donations are being used in the way you want them to be used, you may want to investigate whether the organization is one who focuses on their local community, such as Sullivan Community Space, or focuses their efforts nationally or internationally, such as the World Wildlife Fund or American Red Cross.

Charitable giving has many benefits, both financial and non-financial. By carefully planning your annual giving, you can maximize the impact of your donations and the financial benefits you receive.

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