Tax season? Those two words cause stress and dread, don’t they?
We know that our donors are well aware that making a gift to a cause they care about is one of the best ways to make a positive difference in the world. While studies consistently show that people give because they want to make an impact to causes that are important to them personally, there can also be a tax benefit for their generosity.
It’s important to note that the Tax Cut and Jobs Act (TCJA) that went into effect in 2018 doubled the standard deduction for all taxpayers. This meant that people who normally itemized charitable contributions might no longer be able to do so if their deductions fell within the increased standard amount. What we saw was a decline from 46.5 million taxpayers who itemized in 2017 to 18 million in 2018. But we also have seen an increase in giving amounts over the last few years further pointing to the fact that tax benefits are not the prime reason people give. But it’s still a factor especially for larger contributions.
While the joy of supporting impactful causes generally remains the primary motivator for donors, communicating the additional advantages of tax benefits can a valuable because it might:
Increase Donations. By informing donors about potential tax advantages such as by giving from QCDs or appreciated securities, as two examples, you’re providing them with a clear understanding of the other non-cash ways to giving, which might encourage larger or more frequent donations.
Empower Giving. If donors are looking to stretch their generosity, they might strategize their giving to maximize both their impact and tax benefits. This can lead to more efficient allocation of their resources towards causes they care about.
Market Effectively. Highlighting tax benefits can be a compelling marketing tool, especially for individuals who may be in higher tax brackets. It can grab their attention and make your organization stand out from others by showcasing the additional value proposition of contributing.
Now, let’s demystify some of the tax benefits of charitable giving. While consulting a tax professional is always recommended, here are some key points you should consider adding to any communication efforts when discussing tax benefits with your donors:
- Impact First, Tax Benefits Second
The most important thing to remember: we want our donors to make a gift because they want to support our cause, not just because of potential tax breaks.
Philanthropy is about making a positive impact, and the emotional reward of giving should be their driving force. Tax benefits are simply an additional perk to consider, not the starting point. So, don’t lead with the tax advantage the donor might receive because you don’t know if that donor can still itemize deductions post-TCJA.
- Some Donation Ground Rules
Keep receipts! Always get a receipt for any donation over $250, and maintain bank records for cash donations.
Appraisals for property: Donations of property valued over $5,000 ($10,000 for specific stocks) require independent appraisals.
Factor in benefits: Subtract the value of any received benefits (such as event tickets) from your donation amount before claiming a deduction.
Itemize or not? Itemize deductions only if total donations exceed the standard deduction. Remember, even without a tax benefit, contributions still support a chosen cause!
- Maximizing Donation Tax Deductions
To claim a tax deduction for your charitable contributions, the donor must itemize deductions on their tax return. Again, this means listing actual expenses instead of taking the standard deduction, assuming they exceed it.
Here’s where things get interesting on different types of donations:
- Cash Donations: Straightforward! Cash contributions to qualified charities are generally deductible up to 50% of your AGI. However, some exceptions apply, and this isn’t a one-size-fits-all.
- Donating Appreciated Assets: Was there an investment in stocks, bonds, or real estate that have increased in value over time? Donating these assets (held for more than one year) to charity allows you to avoid capital gains taxes while claiming a full deduction for their fair market value.
- Mileage and Out-of-Pocket Expenses: Donated time and travel expenses for approved charitable activities, e.g. related to volunteering, might be deductible under certain limitations.
- Donor-advised funds (DAFs): Donor-Advised Funds are giving accounts that are managed by sponsoring organizations such as community foundations, public charities, or investment firms. Donors make contributions, like stocks, real estate, cryptocurrency, or retirement assets, and receive an immediate tax deduction for their gift. They do not receive a tax deduction for grants made from that DAF–only the initial investment into the DAF. To learn more about DAFs, click here.
Of course, specific tax information will ultimately depend on each and every individual and what their situation is. But helping educate donors of any gift amount is important, and you should include whatever information you can to help them through the process.
Beyond the Tax Benefit: The True Power of Giving
It should always be clear that tax benefits are a bonus, and shouldn’t be the main driver for a donor’s generosity.
The true power of giving lies in the difference our causes can make. As philanthropists, it’s part of our job to provide resources and information on how tax benefits can be an additional motivator for giving. But ultimately, the satisfaction derived from supporting a cause is the most valuable reward.
Note: This is not financial or tax advice. Individuals should consult their financial or legal counsel for specific guidance on their own situations.
