Types of Charitable Donations and Its Benefits
Posted on January 31, 2021
“In necessary things, unity; in doubtful things, liberty; in all things, charity.”
While charity is a beautiful emotion, one can hit two targets with a single stone by making charitable donations in 2021 and avoiding hefty taxes at the same time. There is no question as to why giving is important because we all know how essential it is for peace of mind and for infusing the right set of values in our future generations to come.
Besides this, charitable giving is immensely beneficial from a financial standpoint wherein you can save big and organize estate, finance, and taxes. In fact, charitable gifts have helped 26% of taxpayers with deductions on their tax returns. With benefits galore, it is about time you put “charity donations near me” on google and help yourself.
But remember that based on your estate-type and the money you want to offer and how you will find umpteen ways of making charitable contributions.
What Are the Ways Of Charitable Donations?
There are several ways of charitable giving, each with its own set of pros and cons. It’s up to you as to which to choose because each of these has different benefits and requirements. Let’s delve deep and find out what exactly the ways of charitable giving are.
Types of Charitable Giving
1. Donor-Advised Funds
Donor-Advised Fund is a form of charity giving where a non-refundable amount is donated to a nonprofit either in cash or securities through a giving account. Administered by a public charity that manages assets for individuals or organizations, DAF is ideal for anyone who is involved in paying taxes on assets or wants to create a legacy involved in philanthropy. Find list of best charities to donate to depends on the cause the charity supports
Benefits of Donor-Advised Funds
- Reduced Tax Costs – Using DAF can help donors achieve various and maximum tax deductions.
- Helps Create a Legacy – You can make your heirs a part of this giving, thereby expanding these charitable donations beyond a single lifetime.
- Direct the Fund’s Administration – If you feel too close to the cause or the organization, you can get involved in how the funds are utilized and direct the fund’s administration as to which grants should be made. However, the recipient isn’t under any obligation to follow which is why it is called ‘Donor-advised’ and not ‘Donor-directed’.
2. Real Estate
Selling property becomes a pain when exorbitant taxes get involved. In order to get out of the tax mess, you must donate to charity the property that you live in or no longer use.
Benefits of Real Estate Donations
- Donate Today, Transfer Later -If you happen to donate the property you live in, you can get into an arrangement where the property is transferred to the charity after your death.
- Lower Estate Taxes – This arrangement will help you with reduced taxes as the value of your home will be taken out of your estate, thereby lowering your estate taxes.
Of all the charitable contributions, giving cash is the easiest of all. A simple formula that the taxes involved in this charitable giving follow is –
Tax deductions = Cash donated – Value of goods/services received in returnBenefits of Gifting Cash
- Incredibly Convenient – Absolutely no hassles involved.
- No Complications – Tax Structures are fairly easy with no complicated structures.
Also Read: Why People Donate Money to Charity
4. Asset Donations
Paintings, life-insurance policies, retirement accounts, jewelry, and vehicles come under charitable gifts and can be donated for the following benefits.
Benefits of Asset Donations
- Income Tax Deduction – Such donations help in avoiding tax liability. For larger tax deductions, try giving your asset to the charity it relates to the most. For example – Gifting your painting to a museum than to a cancer hospital will benefit you more.
- Lower Taxes – It lowers the estate tax.
5. Pooled Income Fund
People who wish to donate to charity but only have modest means can pool together to make a considerable charitable donation. This is perfect for those who want to make a consistent income and would not mind donating a part of it later.
Pooled Income Funds allow donations from multiple donors and provide income streams to beneficiaries. Because of directly contributing to the PIF, all the donors end up with huge income deductions. Not only this, each beneficiary gets a share of the income earned by the fund every year. Upon the donor’s death, a part of the fund (decided beforehand) is given to the charity.
Benefits of Pooled Income Donations
- Reduced Tax Costs
- Yearly Earnings
Note: There’s a Pooled Special Needs Trust for people with disabilities. The added benefits of the same are 24*7 payment turnout, partner with the existing trustee or investment manager, and high efficiency.
6. Private Foundation
If you are someone with a cause that your heart really wants to work towards, setting up your own charitable foundation is a great step. This way, you can create a legacy of your own and get your future generations to work towards the same.
Benefits of Private Foundation
- Control rests with the Donor
- Creates a Legacy
- Reduced Tax Costs
7. Charitable Trusts
Charitable Trusts are of two kinds-
- Charitable Lead Trust
- Charitable Remainder Trust
Charitable Lead Trust
If you are an individual with a huge income event or who is incurring or will incur bumper high-estate and gift taxes when transferring wealth to heirs, investing in a charitable lead trust can help you out. It is a planning tool that reduces tax deductions and estate costs.
It further has two types – (i) Grant Lead Trust and (ii) Non-grantor Lead Trust. While in the former the assets of the trust are enjoyed by the donor at the end of the trust term, assets of the trust are transferred to the beneficiaries designed by the donor in the latter.
Benefits of CLT
- Secured Future – It is a great way to transfer wealth to your heirs.
- Immediate Gift Tax Deduction – The process is swift and the tax deduction is based on the income generated by the charity.
Charitable Remainder Trust
CRT is just like CLT with only one difference which is that in a CRT, the donors along with the beneficiaries get paid first. In other words, they end up getting their income before the charitable trust does.
Benefits of CRT
- Creates Income
- Consistent cash-flow
- Planner Lifetime cash-flow
- Planned Retirement
One of the best ways to carry forth charitable donations to reduce taxes is by contributing securities (example: stocks). Two major benefits of it are as follows-
Benefits of Security Funds:
- Zero Hassle – Neither do you sell your stocks nor do you involve yourself in capital gain taxes. The higher the stock value, the higher will be the tax savings.
- Tax Deductions – Any stock that is a year old and has a value greater than what it was bought for can be donated, thereby becoming eligible for tax deductions equal to the stock’s full market value.
Are Charitable Donations Deductible?
Moving on to the most important questions of all, we have 3 points to highlight:
- Taxpayers may deduct charitable contributions up to 60% of their adjusted gross incomes.
- Charitable donations to individuals, no matter how worthy, are not deductible.
- Donations totaling more than $300 in a year must be itemized.
In the U.S., donations can be deducted from the federal tax returns of individuals and companies making them. U.S. taxpayers are able to deduct up to 60% of their adjusted gross incomes annually. Taxpayers deducting more than $300 in charitable contributions must use Form 1040 or 1040-SR form and itemize their deductible contributions on a Schedule A form. However, as a result of the CARES ACT, the deductible portion of charitable donations has increased up to 100% of AGI.
This is a brief overview of different types of charitable giving and how you can benefit while giving! The best avenue to get started on your journey as a philanthropist is iConnectX. We are a platform dedicated to simplify the process of charitable giving for donors!