Summary: Charitable donations can enhance personal satisfaction, strengthen values, and teach children about generosity. They can also provide financial advantages like reducing tax liabilities and estate sizes, avoiding capital gains taxes, and generating income through trusts.
Main points:
- Charitable giving is essential to many Americans, offering personal satisfaction and financial benefits.
- Personal benefits include feeling good, increasing life satisfaction, reinforcing personal values, teaching children generosity, and boosting community standing.
- Financial benefits can include reducing tax liabilities and taxable estates and avoiding capital gains taxes.
- The effectiveness of donations varies by organization, with due diligence recommended to ensure maximum impact for contributions.
- Engaging a tax professional to develop a charitable giving strategy can maximize benefits for both donors and charities.
Charitable giving habits in the US are trending in a positive direction. That’s a reflection of how important charitable giving is to so many Americans.
Yes, there was a notable drop-off in donations in 2022 (the most recent year for which full statistics are available) from previous years, as the Indiana University Lilly School of Philanthropy reports.
However, individuals and organizations across the US contributed nearly $500 billion to charities, even in that down year. A longer-term review of charitable giving trends from Philanthropy Roundtable shows substantial, sustained increases in giving from 1954 through 2016.
We also know that charitable contributions have increased in most years following the Tax Cuts and Jobs Act (TCJA). This act raised the standard deduction and reduced (although certainly did not eliminate) the financial benefits of donating to charity, as the Tax Policy Center details.
The benefits of charitable giving go beyond those tax advantages, as important as they are for financial and tax planning. When planned properly, charitable donations can be both personally and financially rewarding.
Why is Donating to Charity Important?
For many Americans, donating to charity is an essential part of their lives. They recognize the many benefits of supporting causes they believe in.
Of course, there are tax benefits of donating to charity afforded to us by the IRS Tax Code. However, many people derive immense satisfaction regardless of the tax incentives. From a personal perspective, what are the benefits of donating to charity?
It makes you feel good.
You are probably familiar with the feeling of instant gratification when donating to charity. You might have felt it 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 donating and increasing activity in the brain that registers pleasure. A Charities Aid Foundation (CAF) survey found that 42% of donors do so for their enjoyment.
It improves life satisfaction.
According to another study by the Women’s Philanthropy Institute, people who give more to others experience greater life satisfaction than those who don’t. That’s true for monetary gifts and volunteering. The same goes for entire communities of people who generously give their time or money, with members finding greater satisfaction within the community.
It strengthens personal values.
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.
It teaches children the importance of generosity.
Involving your children in your charitable giving experience helps them appreciate what they have. It can also show 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. You can also consider setting up a donor-advised fund in the family’s name and have your family share in supporting it.
Increase your community standing.
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. Those roles can increase their standing and influence in the community.
What Financial Benefits Do You Get from Donating to Charities?
It’s clear that many people are happy with the personal benefits of donating to charity. However, 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.
Reduce your tax liability.
If you itemize deductions, charitable donations can lower your taxable income. Normally, the amount you can deduct is 60% of your adjusted gross income (AG).
With effective tax planning and a charitable giving strategy in place, you can accomplish two important goals at once. Namely, contributing to causes you believe in and reducing the amount owed on your taxes.
Reduce your taxable estate.
If your taxable estate is over the estate tax exemption limits – $13.61 million for single filers and $27.22 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.
Avoid capital gains taxes.
What are the tax benefits of donating stock to charity, or other assets like real property? Taking this approach can give you a tax advantage and further support your chosen nonprofit organizations as well.
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. At the same time, you avoid the capital gains tax that you would have paid upon the sale of the asset.
Crucially, charities are not taxed on the sale of gifted assets.
Generate income.
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 for a charity for a specified term. The remainder goes to your trust beneficiaries.
How Much of My Donation Goes to the Charity?
Nearly all charitable organizations allocate their contributions between their cause and the expenses associated with fundraising and administering the charity. Even the most efficient nonprofits still need to spend some amount on employee salaries, operational infrastructure (think office space, technology, and other core organizational assets), and raising awareness for their cause.
So, how much of your money 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% and 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. This organization accredits 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.
Other resources for researching charities include Charity Navigator and Candid. Both services offer insights into the operations of charitable organizations.
No matter how you choose to vet a charity, we encourage you to do so. A little time spent on research can help you make a more informed decision about your charitable giving and maximize its impact.
Make Charitable Giving a Strategy
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 qualified tax professional. They can help you maximize your tax savings.
These charitable giving tax benefits are available and can allow you to donate more to your favorite charity. It’s a relatively rare example of a win-win situation, supporting both you and your charities of choice.
Dechtman Wealth Management can help you develop a charitable giving strategy as part of your broader tax plan. Get in touch with us to learn more.
There’s no reason why you and your charity can’t both come out ahead.
https://scholarworks.iupui.edu/bitstream/handle/1805/14283/womengive17.pdf
