Americans have had a long and rich tradition of philanthropy and charitable contributions, and today donations are not only a powerful tool for creating positive change in the world but can help individuals and businesses lessen their tax burden.
While helping address societal needs and supporting local communities by charitable giving is a year-round endeavor, as fall approaches we are getting closer to “Giving Season”, unofficially the final two months of the calendar year.
“The end of the year, also called Giving Season, is a big driver of charitable donations in the U.S. This practice dates back many years and comes with notable financial benefits,” explains J.P. Morgan.
Although charitable giving has been an American institution since the Founding Fathers, it is just within the last 100+ years that Americans have received tax benefits after the passing of the 16th Amendment in 1913 which helped create today’s modern federal income tax and then the introduction of an individual income tax deduction for charitable deductions in 1917.
“Whether you're a seasoned philanthropist or considering your first donation, understanding the ins and outs of charitable contributions can help you maximize your impact while also taking advantage of potential tax benefits,” says seasoned tax pro Steve Powell.
In this article, we'll explore the multifaceted world of donations and charitable giving, from its rich history in the United States to current regulations and best practices.
The Dual Benefits: Tax Advantages and Social Impact
Charitable giving offers a unique opportunity to make a difference in the world while potentially reducing your tax burden.
“From a tax perspective, donations to qualified charitable organizations can be deducted from your taxable income, effectively lowering your overall tax liability,” says Powell. “This incentive encourages individuals and businesses to contribute more generously to causes they care about.”
However, the benefits of charitable giving extend far beyond tax advantages. By supporting worthy causes, donors contribute to solving pressing social issues, from poverty and hunger to education and healthcare.
Every contribution, regardless of size, has the potential to create ripple effects of positive change in communities and even on a global scale.
Moreover, the act of giving itself can bring personal fulfillment, a sense of purpose, and improve your overall health!
“Research shows that giving can boost your physical and mental health in numerous ways,” says the Cleveland Clinic, citing research showing lower blood pressure, less stress, longer lifespans, and a release of feel-good brain chemicals for those giving.
Many donors find that contributing to causes they're passionate about adds meaning to their lives and helps create a lasting legacy.
A Brief History of Charitable Giving in the U.S.
The United States has a long and storied history of philanthropy, dating back to its earliest days. Notable figures like Benjamin Franklin and John Harvard set precedents for charitable giving that would shape the nation's approach to philanthropy for centuries to come.
A pivotal moment in the history of U.S. charitable giving came with the Revenue Act of 1917. This legislation, enacted during World War I, introduced the charitable contribution deduction to the federal income tax code. The act allowed individuals to deduct up to 15% of their taxable income for donations to qualifying charitable and educational organizations.
This change in tax law had a profound impact on charitable giving in the United States. By providing a financial incentive for donations, the government effectively partnered with private citizens to support public causes. This move not only encouraged more widespread giving but also helped establish a uniquely American model of philanthropy that continues to this day.
“This incentive also catalyzed a snowball effect in which many foundations were formed specifically to receive charitable gifts that were now tax-deductible,” says J.P. Morgan.
Over the decades, charitable giving in the U.S. has evolved and expanded.
“Since 1977, charitable giving has increased nearly every year with few exceptions. In 2019, U.S. donations amounted to $449.64 billion and individual gifts increased during the COVID-19 pandemic,” said J.P. Morgan. “Today, about 60 percent of Americans participate in charitable giving.”
And charitable giving isn’t going away anytime soon, according to Donor Box, as a higher percentage of millennials (84 percent) made financial donations to charity in 2021 than baby boomers (72 percent).
Current Rules and Regulations
While the spirit of giving remains constant, the IRS rules governing charitable contributions have become more complex over time.
Here are some key points to keep in mind:
- Tax Deductions: Donations to qualified charitable organizations are generally tax-deductible. However, you must itemize deductions on your tax return to claim these benefits.
- Qualified Organizations: Not all donations are tax-deductible. The IRS maintains a list of qualified organizations, which typically includes religious institutions, nonprofit educational organizations, and various charitable groups.
- Limitations: There are limits to how much you can deduct. For cash contributions, you can generally deduct up to 60 percent of your adjusted gross income. Different limits apply for contributions of property or appreciated assets.
- Documentation: Proper documentation is crucial. For any donation of $250 or more, you need a written acknowledgment from the charity. For smaller donations, bank records or a written communication from the charity suffice.
- Non-cash Donations: Special rules apply to donations of property, vehicles, or appreciated assets. These can offer significant tax advantages but require careful planning and valuation.
Global Giving has a “Will My Donations Reduce My Tax Bill” flowchart that may help some taxpayers.
“Some types of donations, even though they may be for worthy causes, are not eligible for tax-deductible donations,” says Global Giving, citing donations to political groups, candidates, individual people such as GoFundMe pages, and foreign charities as examples of donations that are not tax-deductible.
Best Practices for Charitable Giving
To make the most of your charitable contributions, consider the following best practices:
- Research Thoroughly: Before donating, research the organization to ensure it is reputable and aligns with your values. Websites like Charity Navigator and GuideStar provide valuable insights into charities' financial health and effectiveness.
- Plan Strategically: Consider incorporating charitable giving into your overall financial plan. This can help you maximize both your impact and tax benefits.
- Keep Detailed Records: Maintain thorough documentation of all your donations, including receipts, acknowledgment letters, and any relevant correspondence.
- Consider Alternative Giving Methods: Explore options like donor-advised funds, charitable trusts, or giving appreciated assets, which can offer additional tax benefits and flexibility.
- Stay Informed: Tax laws and regulations around charitable giving can change. Stay up-to-date or consult with a tax professional such as Powell Tax Law to ensure you're making informed decisions.
“Remember that every contribution, no matter how small, has the potential to make a difference. The key is to give thoughtfully and in alignment with your values and financial goals,” advises Powell.
How Powell Tax Law Can Help
Navigating the complexities of charitable giving and tax law can be challenging. At Powell Tax Law, we specialize in helping individuals and businesses develop effective charitable giving strategies that maximize both social impact and tax benefits.
Our experienced team can guide you through:
- Identifying tax-efficient giving opportunities
- Structuring complex donations (e.g., appreciated assets, real estate)
- Setting up charitable trusts or foundations
- Ensuring compliance with IRS regulations
- Optimizing your overall tax strategy through charitable giving
Don't let confusion about tax rules hold you back from making a difference.
Contact Powell Tax Law today to schedule a consultation and discover how we can help you achieve your philanthropic goals while optimizing your tax position.
