Guide to Charitable Giving
Author: W. Dane Carey
Continuing the upward trend, charitable giving in the United States increased to $373.25 billion in 2015 (2.1% of GDP). Over the past two years alone, total giving to charitable organizations has increased over 10%. This increase and the overall size of charitable contributions is a testament to the integral role charities play in our society, a role which continues to grow. Many people give to charitable causes on a regular basis. Charitable giving makes people feel good. And, as an added incentive, such charitable donations can also reduce what you owe Uncle Sam come April 15th.
Unfortunately, many people do not take advantage of these tax benefits—mostly because they do not really understand the impact charitable giving has on their taxes or the rules for deductibility. In particular, people are often unsure of which organizations qualify for tax deductible contributions, how much can be deducted, and what information should be retained about those deductions.
The following information on charitable giving is intended to provide an overview of the who, what, and how of charitable giving.
Who: In order for your gift to be tax deductible, the donee must be a qualified charitable organization. Contributions to individuals, political organizations, and political candidates are never deductible. Permissible donees include the United States, individual states and their political subdivisions, the District of Columbia, and all organizations which are tax-exempt under IRC 501(c)(3). Contrary to common misconception, tax-exemption does not always equate with tax deductibility. Indeed, many types of tax-exempt entities do not qualify as permissible donees. It is therefore important to make sure the organization is a 501(c)(3) organization if you intend to make a deductible contribution to a non-governmental entity.
What: The amount of a donor’s charitable deduction is generally limited to 50% of his or her contribution base for the tax year, and may be further limited, depending on the type of contribution and the type of organization. An individual’s contribution base is generally equal to his or her adjusted gross income. A taxpayer may carry forward the unused portion of charitable deduction for five years. The tax benefit of the gift is based on the individual’s marginal tax bracket. For someone in the 35% income tax bracket, a $1,000 cash gift would reduce his or her tax liability by the amount of the gift multiplied by 35%, or $350.
How: Individuals and corporations can make deductible charitable contributions, but only if the taxpayer itemizes his or her deductions. Taxpayers who claim the standard deduction (as opposed to itemizing) do not receive any tax benefit from their charitable giving. For any contribution, you must itemize your deductions and file a schedule A in order to deduct. (If your non-cash contributions for the year are more than $500, you must also file Form 8283.) The IRS requires proof of all charitable contributions. The level of proof required depends on the value of the contribution and the type of property contributed. Although the type of substantiation that will suffice generally differs from case to case, you must always have a written record about your donation in order to deduct any cash gift, regardless of the amount.
The objective of this article is to provide a basic introduction for clients and their advisors to assist with the philanthropic planning process. Remember, these charitable giving decisions can also come into play for purposes of your estate planning, should you wish to donate to a charitable organization after your death. In either case, it is important to consult with an attorney or investment and tax advisors to determine whether any of the considerations described in this article are appropriate or relevant to your specific circumstances.
If you have questions or would like to learn more about making charitable contributions, feel free to contact Dingeman & Dancer and ask for any of the experienced tax or estate planning attorneys in our firm.