Understanding the tax strategies related to charitable contributions can help you decide how much to give, what asset to give and when to give, so you can provide the maximum amount to charity—and receive the maximum tax advantages for yourself.
Why charitable contributions can help you receive maximum tax advantages
According to the report Giving USA , U.S. families and individuals give an average of more than $1 billion to charity every day—a major force for addressing important needs in our communities. The value of giving is also recognized by the U.S. tax code, which provides a variety of tax incentives to support those who wish to use their funds to do good.
What tax strategies can be used for charitable contributions
Many people know they can deduct donations to charity from their income taxes but increasing your knowledge of tax planning strategies can maximize your giving impact. Check out these easy tips.
- Long-term appreciated assets—If you donate long-term appreciated assets like bonds, stocks or real estate to charity, you generally don’t have to pay capital gains, and you can take an income tax deduction for the full fair-market value. It can be up to 30 percent of your adjusted gross income.
- Combine multi-year deductions into one year - Many taxpayers won’t qualify for the necessary deductions to surpass the standard deduction threshold established by tax reform in 2017. However, you can still receive a tax benefit by “bunching” multiple years’ worth of charitable giving in one year to surpass the itemization threshold. In off-years, you take the standard deduction. Use our Charitable Giving Tax Savings Calculator to estimate your savings.
- Estate Planning - By naming Fidelity Charitable in your will or as a beneficiary of a qualified insurance policy, retirement plan or trust, you reduce or even eliminate the burden of estate tax for your heirs. Your Giving Account continues to support the charities you love and your legacy lives on. (It is important to consult your tax and estate planning advisors regarding modifications to your estate plans.)
- Donor-advised fund - A donor-advised fund is a dedicated account for charitable giving. When you contribute to a charity that sponsors a donor-advised fund program, such as Fidelity Charitable, you are eligible for an immediate tax deduction. You can then recommend grants over time to any IRS-qualified public charity and invest the funds for tax-free growth. Donor-advised funds provide many benefits for organizing and planning giving, but they also offer advantages in terms of income, capital gains and estate taxes. In some cases, these benefits are more advantageous than those from contributing to a private foundation.
How you can defer or reduce taxes through charitable giving
By using the proper tax planning strategies, charitable contributions can reduce three kinds of federal taxes: income, capital gains and estate taxes.
- Income tax strategies—Donations to 501(c)(3) public charities qualify for an itemized deduction from income. Because the tax rate is then applied to a reduced income, this can minimize your overall tax liability. Many donors don’t realize that there are many ways to maximize this seemingly straightforward deduction. For instance, you can “bunch” your charitable contributions in a single tax year, using a donor-advised fund, to increase the amount you donate in a high-income year, and then the funds can be used to support charities over time. Or you can make a combined gift of appreciated assets and cash to maximize your benefits.
Learn about nine ways to reduce your income taxes in a high-income year through charitable giving.
- Capital gains tax strategies—You can use charitable contributions to reduce your capital gains tax liability by donating long-term appreciated assets. Not only can you deduct the fair market value of what you give from your income taxes, you can also minimize capital gains tax of up to 20 percent. Assets subject to capital gains taxes can include investments like stocks or mutual funds, or hard assets like real estate. They can include assets that are both publicly traded or nonpublicly traded. For example, some givers donate shares of a private business before it is sold to dramatically increase their charitable impact.
Learn more about strategies for donating appreciated assets of all kinds.
- Estate tax strategies—The federal estate tax is a tax on the transfer of your property at your death. In 2023 the estate and gift tax exemption is $12.92M per individual, so fewer estates will be subject to this tax.
By making properly structured gifts and donations, you can remove assets from your estate before the total is tallied and taxed. In fact, you have an unlimited charitable deduction if your estate plan makes gifts to charities.
Charitable tax strategies for estate planning purposes can be among the most complex, and it typically makes sense to consult a professional. Commonly used strategies include the use of charitable trusts and careful selection of assets for distribution to various beneficiaries—charitable and otherwise. For example, leaving an IRA to charity and appreciated securities to individuals might allow your heirs to inherit more because of the differences between how these assets are taxed.