We all want to do good things for the world. This can often be accomplished by donating to our favorite charity or cause. After all, it is money that makes the philanthropic work we care about possible.
And, believe it or not, the IRS makes charitable giving a bit more "rewarding" to the giver by providing us with a tax deduction. In effect, the tax deduction lowers the actual cost to us of our charitable contribution. This allows us to give even more – if we want, with the tax savings.
Imagine how powerful your estate can be if you combine traditional gifts to family with other gifts to charities you care about. You can really maximize the legacy you leave the world. And, in doing so, your estate can also reap the tax planning benefits that come with solid estate planning and charitable giving.
If you give to a qualified charitable organization, you are entitled to a charitable deduction applied against your income taxes. To qualify for the deduction, you must itemize deductions when you file your income taxes. By doing this, you reduce the cost of the donation by your tax savings. For example, if you are in the 33% tax bracket, every $100 you donate costs you only $67 ($100 minus the 33% savings on your taxes). The higher your income and tax bracket, the larger your reward for contributing to the charity of your choice.
Of course, leaving part of your estate to charity (in your will for instance) can also reduce the size of your taxable estate and thus save estate taxes if you owe them.
Most 501c3 charitable organizations qualify for a charitable contribution deduction. A 501(c )(3) charity is one that has received a tax-exempt status from the Internal Revenue Service. 501c3 is the Internal Revenue Code (IRC) section that states the requirements for approval of a public charity or private foundation, which is established "for purposes that are religious, educational, charitable, scientific, literary, testing for public safety, fostering of national or international amateur sports, or prevention of cruelty to animals and children." There are also IRC Section 501(c)(4) through 501(c)(27) organizations. These organizations are considered tax-exempt, but not charitable. Examples of these types of organizations include trade associations, social clubs and certain advocacy organizations involved in substantial political lobbying activity.
Charity Navigator is one source that evaluates charities to determine if they qualify for charitable status. It is important to know the status of an organization before electing to donate funds to ensure your contribution will qualify as a tax deduction.
What about charitable giving deduction limits?
Deduction limits are not a concern unless you contribute more than 20% of your adjusted gross income to a charity. The deduction is limited to 50% of your contribution base when the donation is made to a public charity. So, if you adjusted gross income is $100,000, then your deduction limit for the year is $50,000. You should consult with your tax advisor to determine if their ceilings apply to you.
Charitable Giving = Smart Estate Planning
In addition to the intangible and tax benefits discussed above, there are also more sophisticated charitable giving estate planning strategies that allow you to give to your favorite cause and also receive a steady stream of income for you (and your family) while maximizing potential tax benefits. One example is through Charitable Remainder Trusts (CRT's).
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