How to Plan Charitable Donations and Their Benefits

Contributions by 6+ experts

Updated: June 30, 2024

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When planning your legacy, you might consider donating life insurance to charity. Almost any charity or organization can be designated as the beneficiary of your life insurance policy. However, confirming that your chosen charity can accept such donations is important. By naming a charity as the beneficiary of your life insurance, you may also enjoy significant tax benefits, particularly if the organization is tax-exempt. This approach ensures that your philanthropic goals are met efficiently and effectively.

Major Types of Giving

Various strategies can elevate your philanthropic impact, from donating life insurance to charity to setting up a charitable life insurance trust. These methods allow you to support your favorite causes significantly. Understanding each type of giving helps you tailor your donations to align with your financial and charitable goals.

Donations From Your Current Income

Giving from your current income means you're supplying a donation that can be a one-time or recurring amount. Religious tithing (where a percentage of a person'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.

Deferred Gifts

Deferred gifts provide a pathway for contributors to plan their charitable giving in ways that can also offer financial benefits during or after their lifetime:

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 trust stipulations can't be changed without the beneficiary's permission) that helps the grantor reduce their taxable income. The trust disperses income to the beneficiary — the charity — over a set amount of time. When that period is over, the remainder of the trust is issued to the charity.

Life Insurance
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 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 policy's cash value 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 and for the premiums you pay in the future if the charity chooses to maintain the policy.

Gift Annuities
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.

In-Kind Gifts

An in-kind gift is a donation that usually takes the form of a physical asset, like equipment, vehicles, real estate, goods or supplies. For example, organizations like Goodwill and The Salvation Army take in-kind donations that they sell in their thrift stores and use 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 item's fair market value. Goodwill has an online donation value guide to help with these calculations, and most places that accept in-kind gifts offer donation receipts that you can submit with your tax documents.

How to Gift Your Car

Vehicles can be incredibly useful donations because of their utility and financial value. However, the process of donating and figuring out the tax benefits can sometimes be challenging to navigate.

The Process

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 also doesn't necessarily need to be in working order. You or the charity can take it to a pick-and-pull and donate/use the sale proceeds for its mission. The charity could also repair the vehicle and either use it for its operations, sell it and use the proceeds or give it to someone who needs it.

The Benefits

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, receiving a tax deduction for the full fair market value of a vehicle donation used to be easier. However, the IRS has toughened up its standards in recent years 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. However, if you'd rather work with the charity directly, 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

Whether you donate a life insurance policy to charity, establish a charitable life insurance trust or use other methods of giving, understanding the tax implications is essential. Properly structured donations can reduce your taxable income, potentially enhance your tax returns and lessen your future estate taxes, ensuring your philanthropic efforts are as beneficial to you as they are to your chosen causes.

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    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 your donations so that you can prove to the IRS that you made the charitable contributions you say you did. According to the IRS, the charity also needs to be a legitimate nonprofit for you to qualify for deductions. So, be sure to look up the organization using the IRS search tool before you donate. Houses of worship like churches, mosques, temples and synagogues are automatically considered qualified nonprofits.

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    Charitable donations are not subject to gift taxes as long as the money is given to an IRS-approved charity.

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    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

When considering charitable contributions, such as donating life insurance to charity, setting up a charitable life insurance trust or giving money or in-kind gifts, it’s important to conduct due diligence. Familiarize yourself with the signs of fraudulent activities and thoroughly check before committing any resources. This vigilance ensures that your intention to support a worthy cause does not inadvertently support fraudulent entities.

    Confirm the legitimacy of the charity

    If you've been contacted over the phone or by email by someone who says they are 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 nonprofit with the IRS and the Better Business Bureau. Even if it is, reach out to the charity directly to make a donation to ensure you're talking to the appropriate point of contact.

    Dig deeper

    If you want to know more about a charity beyond the information on its website, reach out and ask. The charity's employees and/or volunteers should be able to give you exact numbers about how they spend donations and what percentages go to which efforts, or they should be able to put you in touch with someone who does. If the charity only offers vague details, that could be a red flag about its spending. You can also conduct your 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. However, criminals aren't the only thing to be wary of. 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.

Send cash donations instead of supplies.

Cash donations are likely to go much further in the hands of an established charity, as they can often 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 will likely be incredibly disorganized, and there might not be someone on-site who can process incoming shipments. Perishable food donations, in particular, are likely to go to waste.

Give directly.

During times of crisis, some charities choose to hire third-party telemarketers or texting services. While effective for fundraising, these third parties often have high overhead that cuts into the donations being collected. To make sure the greatest percentage of your donation actually goes toward disaster relief, contact the charity yourself through its official website, email or phone number to donate.

Consider being specific about the use of your donation.

If you're concerned about how your money will be used, it's possible to designate your funds for a specific purpose, such as for current disaster relief efforts instead of general charity operation costs. If you want to take this route, make sure to note your request when you submit your donation. However, many charities encourage people to make unrestricted donations so that the charity can decide how to best allocate the money.

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 for inspiring 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.

Experts' Advice About Making Charitable Donations

  1. What advice would you give someone who wants to donate to charity but doesn't know where to start?
  2. What are the best methods a donor can use to research a charity?
  3. Is it more effective to donate to a local charity or a national one?
  4. What types of charitable donations make the greatest impact?
  5. What are the most common scams associated with charitable giving? How can donors avoid them?
  6. What kinds of scams become more prevalent after a natural disaster?
  7. Are there any other tips that you'd like to offer about informed giving?
Liz Elting
Liz EltingFounder and CEO at The Elizabeth Elting Foundation,
Cameron Barsness
Cameron BarsnessPrincipal at Kutscher Benner Barsness & Stevens
Sandra Miniutti
Sandra MiniuttiVice President of Marketing
Mitchell Kraus, CAP®, CFP®, CSRIC, CLU, ChFC, CHSNC®
Mitchell Kraus, CAP®, CFP®, CSRIC, CLU, ChFC, CHSNC®Owner at Capital Intelligence Associates
Rikki Abzug, Ph.D.
Rikki Abzug, Ph.D.Professor of Management at Ramapo College of New Jersey
Kimberly Taylor
Kimberly TaylorChair, Department of Marketing and Logistics Professor, Department of Marketing & Logistics at Florida International University
John Campbell, JD, CLU
John Campbell, JD, CLUSenior Vice President, Chief Wealth Strategist at Calamos Wealth Management
Shane Enete, CFA, CAIA
Shane Enete, CFA, CAIAAssociate Professor of Finance at Biola University


About Chanelle Bessette

Chanelle Bessette headshot

Chanelle Bessette is a personal finance writer and editor for MoneyGeek.