Charitable giving and your taxes

It’s tax season, typically prime time for articles on IRAs, IRS rules or tax-reduction strategies. 

Instead, I’m going to write about something a bit more personal: donating to charity. Most of us enjoy supporting nonprofit or charitable organizations just to help others. But there are valuable tax considerations of charitable giving to remember.  

This isn’t a comprehensive list, and when it comes to taxes you should always talk to your tax adviser. Each offers some key advantages and potential drawbacks but can help you put your money where your heart is. 

Direct cash gifts Writing a check is probably the easiest way to give. When you write a check to what the IRS considers a qualified organization, the tax benefits are immediate. However, easier isn’t always better. One twist on this approach is to gift appreciated assets such as stocks, mutual funds or other investments. By giving those directly to the charitable organization, you avoid capital gains on their sale and reap the tax benefits of the charitable gift. It’s a double win of sorts. Cash gifts are generally deductible up to 50 percent of adjusted gross income, while contributions of capital gain property are typically limited to 30 percent. 

Your will You can make a charitable bequest of money, a specific property or even what’s left over after the rest of your estate is settled. This type of charitable gift may qualify the estate for special tax benefits. However, be warned: it will be part of the probate process, so it might take some time and will definitely be public, if privacy is a priority. 

Beneficiary designation Over the years, I’ve worked with several folks who have named charitable organizations as beneficiaries on their insurance policies, individual retirement accounts (IRA) or 401(k)s. This is a quick and easy way to make a gift when you’re gone. Since the charity would not have to pay income tax on the gift, it could be a huge benefit. If a loved one receives that IRA as a beneficiary, it comes with a huge tax bill. But charities do not have to pay income tax if they receive donated assets such as an IRA or 401(k). That makes your donation go further. Of course, beneficiary designations supersede what’s in your will, so this approach needs to fit into your overall plan.

Donor Advised Fund (DAF) A DAF is a charitable vehicle that lets you make a gift of cash, appreciated assets or other property. You are eligible for a tax deduction in the same year you make the gift. But in the fund, your gift can be invested and grow tax-free. Now or later, you can decide what charitable organizations can benefit from the money. We made the USAA Giving Fund available last year to give members this option – one that’s simple, private and flexible. 

If you’re searching for more in-depth reading on this topic, IRS Publication 526 is a good place to start.


J.J. Montanaro is a certified financial planner with USAA, The American Legion’s preferred provider of financial services. Submit questions for him online.