There isn’t a one-size-fits-all solution to giving. A smart charitable giving strategy could include any number of giving methods — from direct donations or private foundations to donor-advised funds — and there are different advantages and tax benefits to each.
Many Americans give directly to public charities. A public charity gets its funds from the general public. Public charities typically include churches, schools, hospitals, homeless shelters, medical research organizations and other publicly supported organizations. Donating to a public charity often results in higher, more advantageous tax-deductible limits than a private foundation and you may be eligible for charitable tax deductions in the year in which you make the donation. Direct giving is a great choice for one-time donations and small dollar donations.
Private foundations do not solicit funds from the public but are typically established by a person or group (such as a family or business) who donates the initial funding. The foundation then typically delegates trustees or directors to manage its assets and granting. Generally, a private foundation maintains its own funds and gives grants or loans to one or more charities. It's possible to receive a tax write-off from donating to or establishing a private foundation, but the deduction limit is less attractive than when giving directly to the charity or through a donor-advised fund. It's vital to understand the tax implications of establishing and maintaining a private foundation, as well as the costs and administrative and legal responsibilities of running one.
A donor-advised fund works like a personal fund dedicated to your charitable giving. Donors contribute to the donor-advised fund and may be eligible for immediate charitable tax deductions. Contributions are invested, which gives the money the potential to grow tax-free. Donors can then recommend grants to their favorite charities at any time.
The fund administrators are responsible for vetting the charities donors recommend to ensure they are IRS-eligible and for writing and sending the donation. So, donors don’t have to write multiple checks and meticulously file away receipts for tax time. Instead the donor-advised fund does all the paperwork and donors get one tax document at the end of every year listing all their contributions to the fund.
Donor-advised funds are often a great choice for people whose annual giving exceeds $5,000 and who give to a variety of charities over time. Donor-advised funds are popular for their ease of use; they can typically be accessed and managed online. They also tend to be less costly and time-consuming than private foundations.
More than money
In addition to accepting cash donations, the giving options above may also accept donations of appreciated securities, or complex assets such as real estate or art. Confirm with your charity, private foundation or donor-advised fund to learn which complex assets and appreciated securities are accepted. These assets are also potentially eligible for tax deductions. Keep in mind tax-deductible limits vary by the type of giving organization and the asset type. Be sure to consult with your tax or financial advisor first.
Whether you open a donor-advised fund, donate directly to a charity, establish a private foundation or a combination of them — the important thing is to remember that you have a choice of options.