The last few years have shown that the U.S. is truly a country of givers. Charitable contributions have been increasing to record levels despite the increase in the standard deduction because of the 2017 Tax Cuts and Jobs Act (TCJA). That’s a clear indication that, for most Americans, the benefits of donating to charity go well beyond the annual tax deductions. For those who are generous with their money or time, charity benefits can include enhancements to both their personal and financial well-being.
For many Americans, donating to charity is an essential part of their lives because, either consciously or subconsciously, they benefit in so many ways. Of course, there are the financial benefits afforded to us by the IRS Tax Code. But many people derive immense satisfaction regardless of the tax incentives.
You are probably familiar with the feeling of instant gratification when dropping some change in a Salvation Army bucket or when you click “Yes” when asked to donate to a cause at a grocery checkout stand. For many, knowing they’re helping others makes them feel good—literally. Research has revealed a link between making a donation and increased activity in the part of the brain that registers pleasure. Charities Aid Foundation (CAF) survey confirms that 42% indicate their reason for giving is for their enjoyment.
According to another study by Women’s Philanthropic Institute, people who give more to others—both monetarily and through volunteerism—experience greater life satisfaction than those who don’t. The same goes for entire communities of people who generously give their time or money, with members finding greater satisfaction within the community.
The CAF study also revealed that 96% of those who donate to charities do so out of a sense of moral duty. Many people feel that having the power to help others is a privilege and should be used out of a sense of obligation. For them, giving of themselves helps to reinforce their personal values.
Involving your children in your charitable giving experience helps them appreciate what they have and shows them how they can have a positive impact on those less fortunate than them. Encouraging children to volunteer for charitable organizations is an effective way to involve them. Or you can set up a donor-advised fund in the family’s name and have your family share in supporting it.
Charitable giving doesn’t have to be about others entirely. People who give generously to local organizations are often asked to serve in leadership positions, which can increase their standing and influence in the community.
Although many people are happy to receive charity benefits that aren’t financially related, the financial incentives embedded in the tax code can make it even more worthwhile. For people who get personal satisfaction from giving, being able to also improve their financial position is a huge bonus. Here’s how charitable giving can impact your finances.
If you itemize deductions, charitable donations can lower your taxable income. Normally, the amount you can deduct is limited to up to 60% of your adjusted gross income (AGI). However, under the 2020 CARES Act, individuals are able to deduct a full 100% in 2020, and the COVID relief bill passed in December 2020 extends that for the 2021 tax year.
For taxpayers who don’t itemize because their total tax deductions don’t exceed the standard deduction, the COVID relief bill also extends the $300 above-the-line deduction for cash donations. That’s $300 per person so, if you are married and filing jointly, you can deduct up to $600.
At this point, you can expect charitable deduction limits to return to their pre-CARES Act level.
If your taxable estate is over the estate tax exemption limits–$11.7 million for single filers and $23.4 million for joint filers—the excess will be taxed at the highest estate tax rate of 40%. By gifting assets to a charitable organization, you can reduce the size of your taxable estate.
Rather than donating cash, you can increase your tax benefits as well as the value of the gift received by the charity by donating appreciated assets such as stocks or real property. As the donor, you take a tax deduction based on the asset’s market value while avoiding the capital gains tax that you would have paid upon the sale of the asset. Charities are not taxed on the sale of gifted assets.
If you need the income generated by your cash or non-cash assets, you can make your charitable gift through a charitable remainder trust. You benefit from a current tax deduction on the gift and current income generated by the gifted assets. The remaining trust assets go to the charity of your choice. Or, you can use a charitable lead trust to generate income to a charity for a specified term, with the remainder going to your trust beneficiaries.
Nearly all charitable organizations allocate their contributions between their cause and the expenses associated with fundraising and administering the charity. So, how much of your money actually goes to the cause depends on the charitable organization. Some organizations allocate more than 90% of their contributions to the cause, while others have been found to donate less than 50%. On average, a solid charitable organization allocates between 18 to 27% to expenses.
If you want to vet a charity, you can go to give.org, which is run by the BBB Wise Giving Alliance. The accredit charities that meet 20 standards, including adequate board oversight and strong conflict-of-interest policies. As part of the standards, a charity must allocate at least 65% towards their charitable program and no more than 35% on fundraising.
Whether you derive more satisfaction from the giving or the financial incentives, it would be essential to do it right to ensure the maximum charitable benefits. If you favor a particular cause or program, be sure to conduct proper due diligence on the organization to ensure it’s maximizing your contributions. Because there are tax implications with charitable giving, it also is essential to review your philanthropic desires with a tax professional who can ensure you’re maximizing your tax incentives. There’s no reason why you and your charity can’t both come out ahead.