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Types of Charitable Giving and Their Tax Deductible Benefits

Picture of Ashley Rehn, CPA Ashley Rehn, CPA : December 4, 2018

Tax Planning Strategies Nonprofit
Types of Charitable Giving and Their Tax Deductible Benefits

December 4, 2018 —  ‘Tis the season for giving. Individuals and businesses often find great fulfillment in giving back to their community, supporting our troops, or donating to humanitarian efforts, the arts, education, or environmental initiatives. Charitable giving reached an all-time high in the United States in 2017, at a total of over $400 billion. Whether you donate $1,000 or $10,000,000 annually, understanding where your money is going and how it is benefiting you and your charitable organizations of choice will help maximize your charitable impact.

 The Tax Cuts and Jobs Act (TCJA) enacted permanent changes to the Internal Revenue Code and some provisions—that will expire over time—that impact the tax deductible benefit of charitable contributions you make. Now more than ever, a strategic charitable giving plan can help maximize your tax and financial benefits while ensuring that charitable organizations continue to receive ongoing support for their charitable mission.

Summarized below are the most commonly used charitable giving vehicles available to the philanthropically minded. Understanding the differences between each vehicle can help you choose which one is right for your philanthropic and financial goals.

DIRECT GIVING
  Direct giving is where you donate directly to charitable, religious, educational, scientific or literary organizations. We recommend verifying the authenticity of any charity that you donate to. You can view a listing of IRS-approved registered charities at: 

https://apps.irs.gov/app/eos/

Direct giving provides the greatest level of simplicity. If you itemize on your tax return, you receive a current year charitable deduction for contributions. You must retain proper documentation, which varies depending on the level of contribution made.

Cash is the predominant method of direct giving. However, some charitable organizations will accept noncash contributions such as publicly traded securities, or noncash goods for use in fundraising events or in the operations of the entity.

Tax charitable deductions to a charitable 501(c)(3) organization are subject to AGI limitations based on the type of property:

• 60% Cash;

• 50% Non-capital gain property, or

• 30% Capital gain property

You may work with specific organizations to achieve more structured approaches such as Restricted Grants, Endowments, Charitable gift annuities or Charitable Bequests Upon Death.
 
 

INSTITUTIONAL GIVING

Donor Advised Funds
  Donor Advised Funds (DAFs) are accounts offered by a nonprofit sponsoring organization such as a community foundation or certain financial services providers.

A DAF is a simple giving platform that allows the donor to receive a charitable deduction in the year money is contributed to the DAF. The donor then directs the DAF to make contributions to specified charitable organizations, which must be 501(c)(3) public charities. Each contribution is subject to the approval of the sponsoring organization.

The DAF allows you to give under your family’s name or in complete anonymity—which is not a benefit provided by any other gifting vehicle. 

Similar to direct giving, a DAF allows you to donate cash, publicly traded securities, and other noncash items. Some DAFs also are willing to accept donations of partnership and s-corp interests but there is generally a requirement these items be liquidated immediately upon receipt by the DAF.

Similar to direct giving, charitable deductions to a DAF are subject to AGI limitations based on the type of property:

• 60% Cash;

• 50% Non-capital gain property; or

• 30% Capital gain property

A DAF may charge an initial fee and ongoing annual fees for the account (typically 4-11% of the assets). A professional oversees investment decisions and financial reporting requirements. You are provided one donor acknowledgment letter to support your tax-deductible contribution.

Account size limitations and rules vary by each sponsoring organization, generally starting at $5,000 and up.

Private Foundations
  Private Foundations (PF’s) are a great option for families or businesses looking to donate large amounts of money (generally greater than $3 million). 

PF’s are separate legal entities, long-term and permanent in nature, and provide the maximum amount of control and decision-making authority and allow the donor to conduct direct charitable activities when structured correctly.

PFs create a legacy, offer the ability to pass down from generation to generation, and instill the value of philanthropy in children and grandchildren.

PFs require the most due diligence in compliance and reporting. The activities of a PF are fully transparent via Form 990-PF filed yearly with the IRS.
 

SPLIT-INTEREST CHARITABLE TRUSTS
When a donor has an asset that they wish to use for charitable purposes for a specific period, without fully transferring ownership to a charitable organization they can utilize a split-interest charitable trust.

AGI limitations for charitable deductions vary for split-interest charitable trusts, based on the terms of the trust agreement and the type of property.

Charitable Lead Trusts
  A Charitable Lead Trust (CLT) allows a donor to provide a regular income stream to a charity while ultimately transferring the asset to a non-charitable beneficiary generation. When a donor contributes assets to an irrevocable trust, which is strategically structured, they may be entitled to a charitable deduction for a set period. At the end of the period, the remaining assets transfer to the donor’s beneficiaries—typically a younger generation.

Charitable Remainder Trusts
  A Charitable Remainder Trust (CRT) allows a donor (or other designated beneficiary) to recognize income from an asset during a set period, while ultimately the asset transfers to the charitable organization. These arrangements are most advantageous for highly appreciated property. When strategically structured, charitable deduction is available at the time the assets are contributed to the irrevocable trust.

Details to consider when choosing the best charitable giving vehicle include:

  1. How much are you donating and when?;
  2. What type of assets are you looking to donate? (cash, securities, closely held stock, or other non-cash assets);
  3. Are you looking to donate anonymously?;
  4. How much control do you want to have over investments and grantmaking?; and
  5. How much administrative time and costs are you prepared to invest?

While the simplicity of direct charitable giving makes it the most predominant method used, structured giving offers many benefits. Often, donors find it beneficial to use a combination of methods to meet their optimal philanthropic, tax, and financial goals. If you have questions about a philanthropic giving strategy or are interested in developing one for your family or business, start a conversation with Ashley Rehn, CPA and tax-exempt service area leader at Redpath and Company at arehn@redpathcpas.com or 651-407-5850.
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