Brooklyn FI’s Charitable Gifting Tax Guide

Snagging a tax break isn’t the number one reason to donate to charity, but it is a nice perk. Think of it as a little thank you gift from the IRS. It can also help your donations pack a bigger punch—paying less in taxes could free up more money for the causes you care about most.

Charitable gifting can be tricky from a financial planning perspective, but we’ve got you covered. Here’s a quick rundown so you can be more intentional about how you give.

Can You Write Off Charitable Gifts on Your Tax Return?

Yes, but you have to itemize your deductions to do so. When you file your tax return, you have two options:

  • Take the standard deduction: In 2022, the standard deduction for married couples filing jointly is $25,900 ($12,950 for single taxpayers and married people filing separately). This is how much you can deduct from your income, which effectively reduces your tax bill. It’s a flat amount and doesn’t take charitable gifting into account.  

  • Itemize your deductions: Instead of taking the standard deduction, you might choose to itemize. This is when you list out all your qualifying expenses for the tax year. It makes sense if the total exceeds your standard deduction amount. In this case, charitable gifting does come into play.

On top of charitable donations, you can also write off:

  • Up to $10,000 in state and local taxes

  • Home mortgage interest on the first $750,000 of mortgage debt (this number varies depending on your tax filing status and when you bought your home)

Other Important Things to Know About Charitable Gifting

Now that you’ve got the tax basics down, there are some other important details to keep in mind. Understanding the ins and outs can help you be more strategic about how you give.

  • For charitable donations, both the gift tax and estate tax are unlimited: Whether you give $100 or $100 million, you won’t be taxed on charitable gifts. You also won’t be on the hook for paying estate tax on donations.

  • You must give to a qualifying charity: That includes public charities like churches, schools and hospitals. Private charities like veterans associations, fraternal groups, and private family foundations count too. The IRS keeps a running list of approved charities.

  • You can only deduct cash or property: Time and talent don’t count. Let’s say you’re a lawyer who normally charges $400 an hour. If you do two hours of pro bono work for a non-profit, you can’t deduct $800 on your tax return.

  • Extra value you receive from a charitable gift is not deductible: Let’s pretend you go to a charity gala. The ticket costs $75, but you pay $575. You get to write off the $500 charitable contribution, but the $75 value of your meal and entertainment for the night is not a deductible expense.

What to Give to Charity

Most charities welcome cash donations. It’s a win-win for everyone involved—the organization can use the funds for all kinds of work, and the donor can deduct up to 50% of their adjusted gross income per year if the money is given to public charities (30% for private charities). Here’s how other charitable gifts shake out:

  • Short-term capital gain property: Giving away short-term capital gain property, like appreciated stock you’ve held for less than a year, isn’t advised because your deduction is limited to what you paid for it—not its current value.

  • Long-term capital gain property: This is typically a better deal in terms of the tax break. Let’s say you bought stock 20 years ago for $25 per share, and today it’s trading at $200 per share. That’s a big capital gain. If you donate that stock to a public charity, you can write it off at $200 per share. The deduction caps at 30% of your adjusted gross income up to the fair market value.

  • Personal property: Have a boat or an old car you’re happy to donate to charity? It’s certainly an awesome gesture, but keep in mind that special tax rules apply so you may want to chat with a tax advisor. You might think your boat is worth a bunch of money, but the IRS may make a more conservative estimate.

Other Ways to Give

  • Charitable Lead Trust: This allows you to put money in a trust that a charity holds and draws on for a certain number of years. Anything left after that will be distributed to your beneficiaries.

  • Charitable Remainder Trust: This is the opposite of a charitable lead trust. You put money into a trust that creates income for your beneficiaries for a set amount of time. Any remaining balance at that point will be given to charity.

  • Donor Advised Funds (DAFs): With a DAF, you make a charitable gift to an investment account, then distribute the funds later on. It’s basically like an investment account that’s earmarked for charity. It’s also easier (and cheaper) to set up than a charitable trust.

A Closer Look at Donor Advised Funds (DAFs)

With a donor advised fund, the charitable donations you make—which are tax deductible—are put into a holding account. The funds are then invested in the stock market until you decide where you want to donate them. It’s ideal for folks who want their gifts to be meaningful but aren’t quite sure where to donate yet. 

If you’re hoping to itemize your deductions, you could “stack” your charitable gifts. Instead of giving $10,000 every year to charity, for example, you could lump several years’ worth of donations into one year. That could be enough to put you over your standard deduction amount and enable you to itemize.

You can also donate stock from your portfolio to a DAF. Let’s say you have a good amount of appreciated stock that you’ve held for several years. Instead of selling it, paying capital gains tax, and then giving the proceeds to charity, you could donate the stock directly to a DAF. This allows you to avoid capital gains tax while increasing your gift.

At the end of the day, charitable gifting is about doing good and leaving the world a little better than you found it. Think of the tax breaks as a cherry on top. Feel free to hit us up if you’re looking for more personalized guidance.

AJ Grossan