9 Ways to Give to Charity and Get a Tax Break

Planned giving strategies for leaving your legacy

Photo by Philip Graves on Unsplash

In the US, charitable giving is tax-incentivized by the Internal Revenue Service (IRS).

Here are 9 ways of “planned giving” to support your favorite charities and get a tax break.

Whether you’re a potential donor or a fundraiser for a non-profit seeking an overview of which programs to set up, this article is intended to serve as a quick introduction to the topic for you.

1) Gift

How does it work?

You most likely have done this already some time in your life: You give money to a charity. Not only money can be given, but also assets such as stocks or real estate. Bonus: If you give appreciated assets straight to the charity without selling them first, you won’t have to pay capital gains taxes on the profit.

When does it apply?

If you want to give to charity and enjoy the happiness it creates in you while you’re alive, this is the easy way to go about it. A gift even reduces your taxable income in the year you make the gift, provided you itemize your deductions.

When does it not apply?

If you may want to access the asset during your lifetime, a gift is not the way to go. By making a gift during your lifetime you give up control and access to your property completely.

2) Bequest

How does it work?

A bequest is the giving of money, stocks, a specific account, or other property through a will. It can even be real estate but then it’s called “devise”. After you pass away, the will is executed by an executor in liaison with the probate court.

When does it apply?

Leaving property through a will is a very simple and straightforward way of giving to charity. All it takes is the will! Bequesting property to a charity reduces your estate and can hence reduce estate taxes.

When does it not apply?

Leaving property to a charity through a will would not be appropriate if you want a speedy transfer of the property after your death. Probate can take a while.

3) Beneficiary on Retirement Account

How does it work?

Do you have a bank account? A CD? A brokerage account? Some kind of retirement account? You can determine a charity as the pay-on-death beneficiary for each account by communicating this wish of yours to the financial institution that the account is with (often doable through your online login).

When does it apply?

If you want to avoid probate and a quick passing on of certain assets that are on a bank or brokerage account or with a life insurance company, this is the way to go. Giving in this way to a charity reduces your taxable estate.

When does it not apply?

If you don’t have a single bank or brokerage account and do everything in cash or crypto, this way of giving is not available for you.

4) Qualified Charitable Distributions (QCD) From Retirement Assets

How does it work?

This is like a gift in many ways, only that the gift comes from an individual retirement account. Think of your traditional or Roth IRA. Giving a gift straight from a traditional (not Roth!) retirement account will lower the amount of RMD (required minimum distribution) that you have to take for that year — and that, consequently, reduces your taxable income.

When does it apply?

If you have an individual retirement account, you want to use it to make a gift to a charity during your lifetime, and you want an indirect tax break by lowering your taxable income (if you’re beyond the RMD age, that is).

When does it not apply?

If you do not have an individual retirement account or if you may want to access the funds sometime down the road. QCDs, like gifts, are irrevocable.

5) Charitable Gift Annuity (CGA)

How does it work?

A CGA is a simple written agreement (often only two pages or less) in which the donor grants a lump-sum donation to the charity upfront and is, in return, promised a lifetime income by said charity. The CGA is set up by the non-profit organization, not the donor. A lot of charities allow for CGAs starting already at $10K.

When does it apply?

If you want to give a gift that keeps on giving — to you — during your lifetime, a CGA may be the right choice. It promises a fixed income stream for the life of up to two people, usually you and your spouse. There’s an immediate income tax break for you, the donor, given that you itemize your deductions.

When does it not apply?

If you want or need to maximize your income from your investments, a CGA is not the right tool. That is because a CGA pays less income than a fixed annuity contract issued by an insurance company. Furthermore, in case the non-profit organization goes into bankruptcy, a CGA is not guaranteed by some industry organization like a commercial annuity would be.

6) Charitable Remainder Trust (CRT)

How does it work?

You establish an irrevocable trust (a trust is best visualized as a basket holding cash and other assets with specified instructions on how to handle them) that benefits someone who is not a charity, usually yourself or a family member. You (or the beneficiary) then receive money from the trust, either a fixed amount or a percentage of the trust’s assets. Payments may be for life or up to 20 years. When the trust ends, either at a designated time or by your (or the beneficiary’s) death, the remainder of the trust’s assets is given to a specified charity. This charity has to be specified at the creation of the trust and cannot be changed, hence the term “irrevocable”.

When does it apply?

If you want to receive an annual income from your assets (for life or a specific period) and would like to leave a legacy to a charitable organization, a CRT is a very flexible vehicle to organize for such goals. Since the CRT is considered a charity itself, contributions reduce your taxable income immediately (if you itemize deductions). If the contribution is an appreciated asset, capital gains taxes are avoided. You can also continue to manage the assets of the trust, although there are strict rules in place that prohibit certain transactions such as self-dealing.

When does it not apply?

CRTs are created and customized to specific individual needs and preferences. That comes with legal and administrative costs when setting up the trust and maintaining it annually. So, usually, CRTs are used by larger donors.

7) Charitable Lead Trust (CLT)

How does it work?

A donor sets up a trust and puts funds into it. The trust then pays regular payments (at least annually) to the designated charity. Either a fixed dollar amount or a fixed percentage of trust assets are permitted. If there are funds remaining at the end of the life of the trust (a specified time or event such as the donor’s death), these funds go to the donor or the heirs.

When does it apply?

If want to donate, want a tax break, and want to create a plannable income for the non-profit organization that starts immediately, the CLT is a very useful tool. Most commonly, the benefitting charity cannot be changed (this is called a “non-grantor CLT”, it’s irrevocable), so the charity has security about this income source. This “non-grantor CLT” reduces possible gift or estate tax burdens while the “grantor CLT” (where the trustee decides which charities are being supported year by year) may capture income tax benefits.

When does it not apply?

A CLT is not the right tool if you want to plan for reliable income. CLTs tend to be used by wealthier individuals to give what they don’t need to rely on.

8) Donor Advised Funds (DAF)

How does it work?

Certain public charities, some working in conjunction with a major brokerage firm, offer so-called Donor Advised Funds or Donor Advised Accounts (DAF). Money paid into them is dedicated to charitable giving — not a specific charity yet. When you contribute to a DAF while alive, it reduces your taxable income in the year of your contribution, if you itemize. Once your DAF is in place and is funded, you can recommend grants to be given to any IRS-qualified charity from the DAF account.

When does it apply?

If you want tax breaks for your charitable giving during your lifetime and stay in control of how the money is invested before it’s passed on to a charitable cause, a DAF may be for you. DAFs can also be helpful if you want an income tax break now but don’t know to which specific 501(c)3 organization to give the gift to yet.

9) Family Foundation

A step beyond a DAF would be to create a family foundation with a very significant initial gift. That would allow for even more control and flexibility over investments and the giving process. But family foundations come at the cost of having to comply with rules and regulations for foundations, like having a board of directors or trustees and other administrative hurdles.

Summary

This article has presented brief introductions to nine ways of charitable giving (to US not-for-profits) that allow for the possibility of tax breaks if you pay taxes in the US.

Yes, Uncle Sam wants you! …to give charitably!

These tools should be viewed in the light of your individual situation. If any of them sound interesting and appropriate to you, dig deeper into them by doing a simple Google search — there’s more to each of them than what is presented here in this introductory article. Consider consulting with an estate and tax planning professional before you make any decision.

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