Charitable Giving – How Tax Benefits Vary

As we get into the heart of the holiday season (and charitable-giving season), we have much to be thankful for, be it faith-driven thankfulness, good health, our family, friends, or financial well-being.

Different types of charitable organizations

It is not hard to look around and see people who are less fortunate, and for many, there are charitable organizations that provide aid—be it well-known organizations like The Salvation Army or Goodwill that help aid the poor, or specialized charities like Team Gleason that help people suffering from ALS.

Other charities are set up as Foundations that provide scholarships to specific groups of people. Whatever passion you have for helping people, there is likely a charity that aligns with your goals. When we have been given much, it is a biblical principle that we will want to give back in return.

What types of charitable giving have tax benefits?

There are different types of giving; some types have tax benefits, and some do not. Gifting of material items like cash, stocks and bonds, property, houses, jewelry, and cars, etc. can be deducted from taxable income, subject to Adjusted Gross Income (AGI) limitations.

The amount deducted is based on the fair-market value of the items, and only to the extent that the donation exceeds the value of anything given in return. For example, if you donate money to the athletic department of your Alma Mater, but are given preferential stadium seating in return, the value of that preferential seating is subtracted from the deductible allowance on your tax return.

Is my donation of time and professional services tax-deductible?

Sometimes we donate time and services, and this is not deductible. For example, a contractor who helps build homes out of kindness for Habitat for Humanity would not be able to deduct the hours of work they contribute, even if they are a professional. However, they could deduct things like paint, nails, and drywall that they purchased to contribute to the project.

A valid charity (or 501 (c)(3) organization) for tax deduction purposes—in the eyes of the IRS— includes two types of organizations: public charities and private foundations.

Public charities include the following (according to the IRS)¹⁾:

• Churches, hospitals, and qualified medical research organizations affiliated with hospitals, schools, colleges, and universities
• An organization that has an active program of fundraising and receives contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities
• An organization that receives income from the conduct of activities in furtherance of the organization’s exempt purposes
• An organization that actively functions in a supporting relationship to one or more existing public charities

What is the difference between a public charity and a private foundation?

“Private foundations, in contrast, typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) , and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs.”⁽¹⁾

Tax-deduction limits vary greatly with different types of donations.

The reason that it is important to discern between these types of organizations is that there are limits to the amounts given to these different kinds of entities, based on your AGI. For instance, if you had an AGI of $100,000, you could donate 60% of your earnings to a public charity and have it deducted for tax purposes, but only 30% of your earnings would be deductible to a private foundation. For things like stocks, life insurance, and personal property, these AGI limits are all different.

For help maximizing the tax efficiency of your charitable giving

Being able to give to those less fortunate is something many of us think about as the year wanes and we enter the holiday season. Next month, our charitable-giving post will focus on advanced giving strategies. For help on maximizing the tax efficiency of your charitable giving, we are here! To schedule a free consultation, please visit us at f5fp.com, or schedule a free consultation here.

1. See IRS reference at this link.

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