Using Everything from Life Insurance to Charitable Trusts to Give Effectively
How to Plan Charitable Donations & Their Benefits
Giving to charity isn't just good for your soul; it's also good for your bottom line. By strategically choosing the method of planned giving that works best for you, you not only get to help a cause that you believe in, you can also potentially qualify for tax deductions. Learn more about the major types of planned giving and benefits you can pursue, as well as how to avoid charity-related scams, with our guide to charitable donations.
Major Types of Giving
Donations from Your Current Income
Giving from your current income means you're supplying a donation that can either be a one-time or recurring amount. Religious tithing (where a percentage of one's income is given to a church, mosque, synagogue, temple or other religious institution) can also fall under this category. Donations to charities and houses of worship are tax deductible, so be sure to maintain detailed records of your gifts that you can submit to the Internal Revenue Service (IRS) at the end of the year.
A bequest is a directive in a will that determines where specific assets should go. Charities can be listed as the beneficiary of a bequest.
Charitable Remainder Trusts
This type of deferred gift is a tax-exempt irrevocable trust (meaning the stipulations of the trust can't be changed without the permission of the beneficiary) that helps the grantor reduce their taxable income. The trust disperses income to the beneficiary - a.k.a. the charity—over a set amount of time. When that period of time is over, the remainder of the trust is issued to the charity.
Donating a life insurance policy to charity is a great way to get more bang for your buck. Your beneficiary will typically get an exceptional return on investment for the amount of money paid in premiums toward your policy, making it an excellent option for charitable giving. You have a couple of options for your donation:
- You can choose to maintain ownership of the policy, which gives you the flexibility to use the cash value of the policy for living expenses, and/or you can withdraw your donation from the charity if your feelings about it change. This option allows you to receive an estate tax deduction after you die.
- You can transfer ownership of the policy to the charity so that it can either be maintained by the charity or liquidated. This option allows you to receive a charitable tax deduction for the policy itself as well as for the premiums you pay in the future if the charity chooses to maintain the policy.
A charitable gift annuity is a way for donors to receive tax deductions, a fixed annual income and a sizeable return on their cash assets. It works like this: You enter into a contract with a charity in which you donate a sum of money in exchange for a fixed income every year for the rest of your life. Any money left over is then given to the charity in full. The income is typically a much higher rate of return than the funds would make in a money market or savings account, and the charity gets the benefit of having liquid funds sooner than it would from a bequest in a will.
An in-kind gift is a donation that usually takes the form of a physical asset, like equipment, vehicles, real estate, goods or supplies. Organizations like Goodwill and The Salvation Army, for example, take in-kind donations that they sell in their thrift stores, using the profits to provide services to financially-disadvantaged people. The donations can be deducted from your taxes at the end of the year based on the fair market value of the item. Goodwill has an online donation value guide to help with these calculations, and most places that accept in-kind gifts offer donation receipts that can be submitted along with your tax documents.
How to Gift Your Car
Vehicles can be incredibly useful donations because of both their utility and their financial value. The process of donating and the figuring out the tax benefits, however, can sometimes be challenging to navigate.
The process of donating a vehicle can take several forms, including:
- Giving the vehicle to the charity to be used for its operations
- Allowing the charity to sell the vehicle and use the proceeds to support its efforts
- Donating the vehicle so that the charity can refurbish it and give it to someone in need
The donated car doesn't necessarily need to be in working order, either. You or the charity can take it to a pick-and-pull and donate/use the proceeds of the sale for the charity's mission. The charity could also repair the vehicle for any of the aforementioned uses.
If you donate your car to a qualified charity—which is defined as an IRS-approved, "exempt status" or 501(c)(3) organization—you may be eligible for a sizeable tax deduction, which in some cases may be the full amount of a car's fair market value. In the past, it used to be easier to receive a tax deduction for the full fair market value of a vehicle donation. The IRS has toughened up its standards in recent years, however, and explained in October 2016 that donors may claim a deduction of the vehicle's fair market value only under the following circumstances:
- The charity makes a significant "intervening" use of the vehicle, such as using it to deliver meals on wheels.
- The charity makes a material improvement to the vehicle, i.e., major repairs that significantly increase its value and not mere painting or cleaning.
- The charity donates or sells the vehicle to a needy individual at a significantly below-market price, if the transfer furthers the charitable purpose of helping a poor person in need of a means of transportation.
If you're interested in making a tax deduction for your donated vehicle, be sure to document everything and get receipts from the charity before the end of the year.
Where to Find Car Donation Centers
Some services, like Donate a Car, help donors select a charity and then assist that charity with the sale of the donated car so that the profits can be used for its charitable efforts. If you'd rather work with the charity directly, however, many nonprofits have dedicated web pages that contain instructions for how they handle car donations. Another option, and arguably the easiest way to get the maximum tax deduction, would be to sell the car yourself and donate the cash proceeds.
How Charitable Giving Affects Your Taxes
From cash to in-kind items, your charitable donations can qualify you for tax deductions at the end of the year, lowering your taxable income and potentially increasing your tax refund. Keep official, itemized records of all of your donations so that you can prove to the IRS that you made the charitable contributions you say you did. To qualify for deductions, the charity also needs to be a legitimate non-profit, according to the IRS, so be sure to look up the organization with the IRS' search tool before you donate. Houses of worship (like churches, mosques, temples and synagogues) are automatically considered qualified non-profits.
Charitable donations are not subject to gift taxes as long as the money is given to an IRS-approved charity.
Much as with income tax deductions, donations to qualifying, IRS-approved charities can reduce the amount paid in estate tax after your death.
Avoiding Scams and Donating Wisely when Giving to Charity
It can be hard to distinguish a scam email, phone call or piece of mail from an authentic one, especially when the sender uses emotional language in their request. It is important to take precautions to ensure your charitable contribution counts.
How to Spot and Avoid a Scam
Confirm the legitimacy of the charity
If you've been contacted over phone or email by someone who says he or she is reaching out on behalf of a particular charity, the safest move is to not give out your financial information or click on any links or attachments, even if a request sounds or looks legitimate. Look up the organization online to see whether it's an accredited non-profit with the IRS and the Better Business Bureau. Even if it is, the best move is to reach out to the charity directly to make a donation so that you can make sure you're talking to the appropriate point of contact.
If you want to know more about a charity beyond what their website says, reach out and ask. The charity's employees and/or volunteers should be able to give you exact numbers about how donations are spent and what percentages go to which efforts, or they should be able to put you in touch with someone who does. If they're only offering vague details, that could be a red flag about their spending. You can also conduct your own independent research by performing an internet search for news articles related to the charity.
Be wary of donation bins
If you're making an in-kind donation to a charity, try to donate at a brick-and-mortar location. If you must use a donation bin, be sure to find one that properly displays logos, a mission statement and contact information. Goodwill has a checklist on their website that shows donors how to distinguish legitimate donation bins from fake ones.
Effective Giving after a Natural Disaster
The chaos following a natural disaster is often when scam artists decide to make their move. Criminals aren't the only thing to be wary of, however. Even legitimate attempts to help after a natural disaster can be misguided or inefficient. These tips will help you make informed decisions when donating money after a disaster.
Don't send supplies.
Cash donations are likely to go much further in the hands of an established charity, as they're often able to leverage their connections with retailers to purchase food, blankets, clothes, medicine and other necessary items in bulk. Also, in the wake of a disaster, an affected area is likely to be incredibly disorganized, and there might not be someone on-site who's able to process incoming shipments. Perishable food donations in particular are likely to go to waste.
During times of crisis, some charities choose to hire third-party telemarketers or texting services that, while effective for fundraising, often have high overhead that cuts into the donations that are being collected. To make sure the greatest percentage of your donation actually goes toward disaster relief, reach out to the charity yourself through its official website, email or phone number to donate.
Consider getting specific about what you want your money to be used for.
If you're concerned about where your money is going to be used, it's possible to designate your funds for a specific purpose (e.g. for current disaster relief efforts instead of general charity operation costs). If you want to take this route, be sure to make a note of your request when you submit your donation. Many charities, however, encourage people to make unrestricted donations so that the charity can decide for itself what the best allocation for the money is.
Avoid opening suspicious emails.
If you get an email from someone claiming to be a victim of the disaster or if you get unsolicited, disaster-related emails that contain links or attachments, they are likely to be scams or viruses. It's recommended that you delete these emails and work directly with charities that support disaster-relief efforts.
Double-check donation requests made over social media.
Thanks to viral videos, photos and other types of emotional posts, social media has become a powerful platform to inspire people to help after a natural disaster. Unfortunately, scammers have also harnessed the power of heart-wrenching imagery to trick people into giving money to fake or highly ineffective charities. Be sure to confirm the authenticity of a charitable request before you make any donations.
Sandra Miniutti is former vice president of marketing for Charity Navigator, an organization that helps donors make informed charitable giving decisions. Read on for her advice on how to make the most effective choices when it comes to giving.
What advice would you give someone who wants to donate to charity but doesn't know where to start?
The most important thing to think about is what you want to accomplish in the world, and you should get very specific about how you want to help. Even for a cause like cancer, which many people are interested in, there are a lot of opportunities. Do you want to fund research? Do you want to fund advocacy? There are all different kinds of charities, so you have to choose which ones align with what you want to help with.
What are the best methods a donor can use to research a charity?
We recommend being a proactive donor and not just a reactive one. When you research a charity, you want to vet them and make sure they're financially strong. There should be some evidence of impact. [Charity Navigator] is one way to find charities based on the work they do.
Is it more effective to donate to a local charity or a national one?
It's a matter of personal preference and depends on what you want to accomplish. Giving locally means you can usually take part and see things in action more. You can roll up your sleeves and help. You can assess risk and opportunities better.
National organizations tend to be the larger charities that are more vetted. These days with improved technology, national charities are able to show videos, maps, etc. of their work. There are more opportunities to connect with donors than there used to be.
What types of charitable donations make the greatest impact?
It's important to concentrate your giving. When people put money in the stock market, the best practice is to diversify. We recommend the opposite for charitable donations. Take the time to pick one or two (maybe three) charities and stick with them for the long haul by making regular donations instead of spreading your money thin. Charities are happy to have whatever you can give, although monthly donations are highly recommended because it's regular cash flow that the charity can depend on. You can usually set up your recurring donation through your bank or the charity website portal. These kinds of repeated payments can be easier on the donor's budget too.
What are the most common scams associated with charitable giving? How can donors avoid them?
The biggest issue is that there are so many charities. In the United States, there are more than 1 million. Sometimes we think that just because a charity is designated 501(c)3 it's been vetted, when in fact it may be really ineffective. There are too many charities for the government to keep close tabs on them all. Another problem is that there are a lot of charities with similar-sounding names, so donors sometimes accidentally give to an organization that they didn't mean to.
If you're a proactive donor and research the charities you want to give to, you can avoid scams much more easily.
What kinds of scams become more prevalent after a natural disaster?
Anytime there's a massive amount of money moving, criminals are going to come out of the woodwork to take advantage of that goodwill. After Hurricane Katrina, for example, there were about 4,000 websites that popped up that said they were charity sites when in fact many of them were scams.
Donors should be wary of people standing outside of the supermarket asking for money as well as pub crawls and other events that say they're supporting a charity. In addition, social media and email are a good way for scammers to reach people. You don't want to click through and enter your financial data or personal information. Instead, you should vet the charity and go through an official website.
Are there any other tips that you'd like to offer about informed giving?
Be as thoughtful with your giving as you are with your financial investments. Our research shows that the vast majority of charities are accountable and work very hard to be effective, so just take the time do your homework to find a charity whose work you believe in.
- The Better Business Bureau's Wise Giving Alliance is a charity watchdog group that allows consumers to look up reports that show if a charity is accredited and verified as tax-exempt by the IRS.
- The Federal Trade Commission offers a list of signs that a charity might be a scam.
- The IRS website explains the differences between gift taxes and estate taxes.
- Charity Navigator's article on the tax benefits of giving provides information about what tax deductions you may be eligible for.
- The IRS' exempt organizations search tool can help you determine whether a charity is recognized as a tax-exempt non-profit.
- The Donate a Car organization helps you sell your vehicle and donate the proceeds to a charitable cause that you believe in.
- How bail funds can be a charitable option to help specific individuals who cannot afford bail.
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