As the end of the year draws near, many people are looking for ways to lower their taxes by maximizing their deductions. This is where charitable giving strategies and the charitable donation tax deduction can come in to help!
This article explores charitable contribution limits for 2024 along with a range of other charitable giving strategies you can use to maximize both your impact and your charitable tax deduction.
Maybe you’re a frequent donor already, or perhaps you’re simply looking to give more intentionally this year. Either way, understanding these guidelines will help you be better prepared to make the most of every dollar.
Understanding Charitable Contribution Limits for Donations
If you’re looking to reduce taxes in the current year and have either cash or non-cash assets you’d like to donate, it’s important to understand the charitable contribution limits set by the IRS.
These annual charitable contribution limits specify how much of your donation you can deduct based on your income and donation type.
First, it helps to know that to take advantage of the charitable contribution deduction, you need to itemize your deductions. You can do this by using schedule A of form 1040. If, based on the current charitable contribution limits, the amount you’d be able to deduct from your donation is less than the standard deduction, you might be better off using the standard deduction.
How Much of Your Charitable Donation Can You Deduct?
Let’s take a look at how much of your donation you may actually be able to deduct based on the current IRS charitable contribution limits.
- For cash donations to qualified charities (see below for more details on what qualifies), most individuals can deduct up to 60% of their adjusted gross income (AGI) in 2024. This limitation is currently projected to remain the same for 2025.
As an example, if your AGI is $100,000, you can typically deduct up to $60,000 for cash contributions.
However, it’s important to note that certain types of organizations, like private foundations, often have a lower limit of 30% for cash contributions.
- When it comes to non-cash donations, such as stocks, real estate, or other appreciated assets, the deduction cap is generally set at 20% - 30% of AGI. You can generally deduct up to 30% of your AGI for donations of long-term capital gain property to qualified public charities. For donations to private foundations, the deduction limit is typically 20% of your AGI for long-term capital gain property.
Also keep in mind that for any donation over $250, you'll need a written acknowledgment from the charity.
If your charitable contributions exceed the allowed amount for a given year, you can carry the unused deduction over to the following year (for up to five years).
What kinds of organizations can you donate to while qualifying for the charitable contribution deduction?
To qualify for the charitable contribution deduction, donations must be made to certain types of organizations that are recognized by the IRS as qualified charitable organizations. Here are the primary categories of organizations you can claim a deduction for when you donate:
1. 501(c)(3) Organizations
A 501(c)(3) organization is a nonprofit that typically operates for religious, educational, charitable, scientific, or literary purposes, or for the prevention of cruelty to children or animals.
2. Government Entities
Donations to a state or local government that is used exclusively for public purposes qualify. An example of this could be your local police or fire department that uses the funds for a community service or charity project.
3. Veterans’ Organizations
Certain veterans' organizations, like the American Legion or the VFW, can qualify for charitable deductions if they meet the IRS's requirements under 501(c)(3).
4. Educational Organizations
Donations to schools, colleges, and universities, including contributions to endowment funds or scholarships, are generally deductible, provided the institution is recognized as a 501(c)(3).
5. Other Notable Organizations
The Salvation Army, American Red Cross, CARE, Goodwill Industries, United Way, Scouts BSA, Girl Scouts of America, Boys and Girls Clubs of America, are other examples of organizations that typically qualify as public charities under IRS guidelines.
For a full list of organizations that you can give to in order to take the charitable contribution deduction, please see Table 1 of IRS Publication 526 on the IRS.gov website.
When do you have to make your charitable donation to use the charitable contribution deduction?
In order to take advantage of the charitable deduction in any given year, you need to make your gift or donation before the end of that specific calendar year. So if you’re looking to take the deduction for the 2024 tax year, you’ll want to make your gift by December 31, 2024.
4 Tips to Optimize Tax Planning for Charitable Donations
Planning ahead for charitable giving can help you take advantage of the available tax deductions more fully. Here are a few tips to consider:
1. Bundle Contributions
If you want to increase your deductions in a given tax year, consider “bundling” donations. This means consolidating several years’ worth of contributions into one tax year. This lets you surpass the standard deduction limit and itemize your deductions so you can take advantage of the charitable deduction.
2 . Time Your Contributions
Do you anticipate a notable increase in your income in a given year? Consider timing your donations to offset this spike. High-income years offer unique opportunities to leverage charitable donation tax deduction thresholds, allowing you to donate and deduct more while offsetting tax obligations.
3. Keep Good Records
Keeping accurate records is essential, especially for non-cash contributions, which require additional documentation. Make sure to save donation receipts, proof of fair market values, and any relevant appraisals for high-value items. Accurate reporting can also help you prevent issues in the event of an IRS audit.
4. Donate Appreciated Assets
One of the best ways to maximize charitable giving is by donating appreciated assets, such as stocks or real estate. By donating appreciated assets instead of cash, you could avoid capital gains taxes and deduct the asset’s full fair-market value, provided you’ve held the asset for over a year.
Charitable Giving Strategies to Integrate Into Your Estate Planning
For those who want to leave a legacy of giving, incorporating charitable giving strategies into your estate plan can help you ensure that your philanthropy continues while helping you achieve potential tax savings.
A Charitable Remainder Trust (CRT) and a Charitable Lead Trust (CLT) are two effective tools for achieving this.
Charitable Remainder Trust (CRT)
A charitable remainder trust (CRT) allows you to donate assets to charity while still receiving income from the trust during your lifetime. The remainder of the trust’s assets will go to the charity after your passing.
As far as taxes go, you can take an income tax deduction in the year that the CRT is funded. This deduction will be based on the present value of the charitable remainder interest (the portion that will eventually go to charity after the trust terminates).
Additionally, a CRT can help you avoid capital gains tax on appreciated assets placed in the trust, making it an appealing option for donors with investments or property.
Charitable Lead Trust (CLT)
In contrast, a charitable lead trust (CLT) works differently by providing income to a charity for a set period of time. After that time period, the remaining assets are passed on to your beneficiaries.
Unlike a CRT, a CLT does not provide an immediate income tax deduction. The main tax advantage of a CLT is in reducing estate and gift taxes, particularly for individuals with large estates.
Since the assets in the CLT are gifted to the charity first (and the remainder to heirs later), the value of the gift to the charity reduces the taxable value of your estate or the gift to your heirs.
Consider a Donor-Advised Fund (DAF) as One of Your Charitable Giving Strategies
A Donor-Advised Fund (DAF) is a great charitable giving tool. It allows you to make charitable donations, receive an immediate tax deduction, and gift assets to qualified charities over time.
Essentially, a DAF acts as a charitable savings account. You can contribute cash, stocks, or other assets, and receive a tax deduction in the year the donation is made. The deduction is based on the fair market value of the assets donated (up to certain limits based on your income).
Once the funds are in the DAF, they can be invested in a variety of options offered by the sponsoring organization. The assets grow tax-free, and you can recommend grants to charities from the fund at any time.
Charitable Giving Strategies for Retirees: Qualified Charitable Distribution (QCD)
A Qualified Charitable Distribution (QCD) is a tax-efficient way to make charitable donations directly from your Individual Retirement Account (IRA) to a qualified charity.
This option is available to individuals aged 70½ or older. It lets you transfer up to $100,000 per year directly from your IRA to one or more qualified charities. The key advantage of a QCD is that the distribution is excluded from your gross income, unlike regular IRA withdrawals that are subject to ordinary income tax.
QCDs count toward your Required Minimum Distribution (RMD), which is the amount you're required to withdraw from your IRA each year after reaching age 73 (for individuals who turn 73 after December 31, 2022).
By directing your RMD to a charity via a QCD, you can fulfill your distribution requirement while also reducing your taxable income.
To qualify for a QCD, the transfer must be made directly from the IRA custodian to the charity, and the charity must be a qualified 501(c)(3) organization.
Key Takeaways for Charitable Giving Strategies:
- Maximize tax benefits by understanding the limits: Charitable donations can provide significant tax advantages, including deductions up to 60% of your AGI for cash gifts and up to 30% for non-cash assets given to qualified charities.
- How much can I deduct for charity in 2024? Your deduction amount depends on your AGI, donation type, and the receiving organization. For those with retirement accounts, a QCD allows for tax-free giving up to $100,000 annually.
- Diversify charitable giving strategies: Consider integrating advanced giving strategies that may apply to you situation, such as Donor-Advised Funds (DAFs), Charitable Remainder Trusts (CRTs), or Qualified Charitable Distributions (QCDs) into your financial and estate plan.
- Consult an Expert: The world of charitable giving can be complex, especially for high-net-worth individuals. Working with a financial advisor can help you navigate the best strategies for aligning your philanthropy with your broader financial and estate goals.
Align Charitable Goals with Your Financial Plan
For high-net-worth individuals, charitable giving can be an incredibly effective tool for both wealth management and estate planning. A well-crafted charitable giving strategy can help you reduce estate taxes, defer income taxes, and leverage your philanthropic efforts to make a lasting impact.
Whether through Donor-Advised Funds (DAFs), Charitable Remainder Trusts (CRTs), or other advanced giving strategies, working with a financial advisor who specializes in charitable giving can help you make the most of your philanthropic opportunities.
If you're looking to develop or integrate a comprehensive charitable giving strategy into your financial plan, contact The Troncoso Group today. Our team of financial advisors in Tampa (working with clients in Florida and nationwide) specializes in aligning charitable goals with estate and financial planning, ensuring that your philanthropy works as hard for you as it does for the causes you support.
