What Goldilocks Can Teach Us About Taxes and Giving | Sharpe Group
Posted April 1st, 2016

What Goldilocks Can Teach Us About Taxes and Giving

Illustration of fairy tale "Three bears".

By Barlow Mann

While people rarely make a charitable gift of a dollar just to save less than 40 cents, in most cases, as the result of a federal income tax charitable deduction, it is undeniable that many donors utilize and appreciate the deductions at tax time every year.

Giving USA and IRS data indicate approximately 80 percent of the amount given by individuals each year is reflected as itemized charitable deductions on federal income tax returns.

Experienced fundraisers know it can be a mistake to overemphasize the charitable deduction. That’s because many donors do not itemize, and some generous donors give more than they can deduct in a given year. But ignoring the tax benefits of a gift can also be a costly mistake.

It may be that taxes and giving require a “Goldilocks” approach—don’t be too “hot” and overemphasize tax benefits, but also don’t be too “cold” about the subject and ignore the role of prudent tax planning when making charitable gifts. Instead, be aware of your audience and integrate appropriate messages about the various tax benefits donors may enjoy, while recognizing that the tax considerations are generally the same regardless of who receives the gift and other motivations are almost always central to the underlying decision to make the gift.

Tax basics

Keeping basic tax rules in mind can help you help donors make the most of their charitable gifts. Here is a refresher:

  • Every taxpayer is allowed a standard deduction that varies according to the taxpayer’s filing status. To benefit from the charitable deduction, donors must have more total itemized deductions than their standard deduction amount. Otherwise, they should simply take the standard deduction.
  • As the standard and the charitable deduction amounts are typically the same each year, a donor should consider “bunching” gifts into certain years, thereby allowing the donor to benefit from the charitable deduction in those years. This is why some savvy donors make larger gifts every other year. For this reason, be careful when only recognizing “loyal” donors who give every year as you may miss some of your best donors with that approach.
  • As noted above, there are limits on how much can be deducted each year for tax purposes. Cash gifts may be deducted up to 50 percent of the donor’s adjusted gross income (AGI) in a given year. Amounts in excess of this limit may be carried over for use in as many as five future years. As a result, some donors making large gifts may benefit from deductions in as many as six tax years. Any amount that cannot be claimed during that time period provides no tax benefit.
  • Certain noncash gifts may be deducted at their full value for income tax purposes. Popular examples include gifts of stocks, other securities and real estate that has been held for longer than a year. These gifts may be deducted up to 30 percent of the donor’s AGI with the same five-year carryover period as cash gifts. Special rules apply to tangible personal property such as automobiles, art and antiques, inventory gifts and other gifts that would give rise to “ordinary income” if sold.
  • The overall 50 percent of AGI limit is the maximum ceiling each year for charitable gifts, and cash gifts must be claimed first. A variety of planning techniques are available for donors who may be impacted by these limits. Basic approaches include making larger gifts in several installments spanning multiple tax years and matching larger gifts with high-income years or certain “recognition events” such as the sale of a highly appreciated asset like a business, farm or stock option redemption.
  • It is also important to understand that gifts to some nonprofits are not tax deductible. This would include many organizations whose primary purpose is lobbying, athletic activities or other missions that do not qualify for tax-deductible gifts. Even when made to a qualified charity, a gift must meet other IRS rules. For example, the donor must not receive any tangible benefits in exchange for the gift; if benefits beyond token items are received, their value must be deducted from the amount to be itemized. That is true even if the items that give rise to the benefit were donated and cost the charity nothing. These and other rules are explained in IRS Publications 526 and 1771 or 1772, which can be downloaded here.

Getting it just right

You don’t have to be an accountant, tax attorney or financial planner to be a successful fundraiser. You do, however, need to understand the basic tax and other financial benefits that can result from well-planned gifts so you can help motivated donors make the most of their charitable gift dollars. Informed donors can decide how to find the “just right” size, form and timing of their gifts so they can enjoy additional satisfaction during tax time.

barlow-mannLearn more about the tax and financial aspects of gift planning at one of Sharpe’s popular training opportunities. Click here for details.

Barlow Mann is COO of Sharpe Group.

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The publisher of Sharpe Insights is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Sharpe Insights may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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