There are many benefits to charitable giving, including improved mental and emotional health.
Along with the more obvious benefits to charitable giving, it’s also a valuable addition to any wealth management strategy.
1. Donating to charity can lower your taxable income
The IRS provides tax benefits for those who donate to organizations with a 501(c) tax-exempt filing status.
When you give to a qualified organization, you can deduct that amount from your taxable income. For example, if you make $200,000 annually and contribute $10,000 to charity, then your taxable income is reduced to $190,000. This can result in noticeable savings, especially if you’re in a higher tax bracket.
Before giving to an organization, make sure that they qualify for a charitable deduction. You can only deduct contributions made to qualified organizations.
There are limits to how much you can deduct, but you should only be concerned if you donate more than 20% of your adjusted gross income (AGI). If you donate to a public charity, your deduction is limited to 60% of your AGI. For example, if you have an adjusted gross income of $100,000, your deduction limit for that year is $60,000. A donation to certain private foundations, veterans organizations, fraternal societies, and cemeteries is limited to 30%.
If you give more than the limit in one year, the excess is carried over for five years before expiring.
In order to receive an income tax deduction, you must itemize your deductions. Your itemized deductions must be greater than the standard deduction. If they're not, stick with the standard deduction.
If you want to claim a charitable deduction of more than $250, you need to keep documentation of your contributions. The receipt needs to include the name of the charity, the value of your gift, the date the donation was made, and a statement verifying that you did not receive any goods or services in return for your gift.
If you are audited by the IRS, you must be prepared to verify your claim with a canceled check, credit card statement, bank statement, or a written acknowledgement from the organization.
If you’re retired and have an IRA account, you must start taking required minimum distributions (RMDs) from the account starting the year you turn 72 or you’ll be charged a 50% penalty on the undistributed amount. This amount that you withdraw adds to your taxable income.
The IRA Charitable Rollover (also known as a Qualified Charitable Distribution or QCD) allows individuals over 70½ years old to donate up to $100,000 to charitable organizations directly from their IRA, without that donation being counted as taxable income when it is withdrawn.
To qualify for tax benefits, contributions must come from a traditional IRA or Roth IRA, and they must be made directly to a qualified charitable organization. Additionally, the donor may not receive goods or services in exchange for the donation, and they must retain a receipt from each charity to which a donation is made.
2. Giving stocks to qualified charities can minimize your capital gains
To avoid additional taxes and capital gains on appreciated assets, you may consider gifting stocks to a charitable organization. When you donate stocks to qualified charities, you don’t pay capital gains tax on the stock, and neither does the charity.
In order to qualify, you must give to a 501(c)(3) public charity and the assets must be donated rather than selling them first.
If your chosen charity can’t accept appreciated securities or mutual funds, consider using a donor-advised fund (DAF). A DAF is an account that allows donors to make charitable contributions of personal assets, including cash, stocks, real estate, and more. Donors receive an immediate tax deduction and their contribution is placed into a DAF account where it can be invested and grow tax-free. At any time afterward, donors can recommend grants from their accounts to qualified charities.
3. Giving to others improves your emotional well-being
Research has found that charitable givers experience measurable psychological and physiological benefits. Those that give to charity benefit from reduced stress, greater satisfaction, better physical health, and increased overall happiness.
A study conducted by the University of Missouri-Columbia and the University of California-Riverside found that people who gave to others tended to score much higher on feelings of joy and contentment than people who did not.
While it’s not clear how long these benefits last, it’s clear that giving back is good for you. A study by a University of Oregon professor found that charitable giving elicits a surge of dopamine and endorphins that are experienced as “hedonic” and rewarding, similar to the brain’s response to drugs and other stimuli. Charitable giving can feel pleasurable in the deepest parts of your physiology.
4. Help to better your community
Community organizations, as opposed to national organizations, are able to respond faster and more appropriately to the needs of local communities. Community organizations are largely funded by private donations, so giving to local charities can provide direct support for the programs that enhance community well-being.
If you’re considering charitable giving as part of your wealth management strategy, connect with the financial planning team at Daly & Associates. Let us help make sure your next chapter leads you to the destination you’ve been dreaming of.