Compared to residents of other wealthy nations, Americans are more likely to give their time and money to help others. In 2023, the United States ranked ninth in per capita gross domestic product (GDP) but fifthon the World Giving Index rankings.
Polling shows that Americans trust nonprofits more than government or business, but they generally know little about charitable giving and philanthropy, such as how these organizations distribute their funds and the rules that govern their activities.
Giving money to charity can provide personal and financial benefits to donors and be a part of the legacy they leave behind. If you are thinking about making a charitable gift—either now or when you pass away—there are some things to be aware of so you can make the most of your donation.
Fewer Americans Donating to Charity
Total charitable giving in the United States dropped 10.5 percent from 2021 to 2022, according to the report conducted by Giving USA 2023. As a percentage of disposable personal income, giving declined to a 40-year low of 1.7 percent. Overall, the number of US households that annually give to charity declined from 66 percent in 2000 to less than 50 percent in 2018.
Nearly half of Americans who stopped giving to charity in the last five years told the Better Business Bureau they did so because they believe the wealthy are not paying their fair share. Others said they just could not afford to contribute to charity.
Some statistics paint a rosier picture of American generosity. Adjusting for inflation, charitable giving by Americans was seven times greater in 2016 than it was in 1954. US charitable giving as a proportion of GDP has also increased slightly over this period but has remained at around 2 percent for decades.
Americans grew more generous during the pandemic, with 2020 and 2021 donations both topping 2019 giving levels. A recent Gallup poll reveals that 81 percent of Americans donated money to charity over the past year, with the percentage of those giving rising in proportion to household income. Around 90 percent of households making $100,000 or more give money to charity each year.
Where Americans are Donating
There are approximately 1.5 million charitable organizations in the United States. Generally, the Internal Revenue Service (IRS) defines public charity as any organization that receives a substantial portion of its income from public donations.
Many—but not all—charities qualify as tax-exempt under IRS rules. The 501(c)(3) tax exemption, known as the charitable tax exemption, allows qualified organizations to avoid paying federal corporate and income taxes for most revenue sources.
Designated 501(c)(3) charities are also able to solicit tax-deductible contributions that allow donors to deduct money given to these organizations on their tax returns. A gift made to a qualified tax-exempt organization as part of an estate plan can help to reduce estate taxes as well.
To meet tax-exempt IRS requirements, an organization must exclusively exist for one of these purposes:
- Charitable
- Educational
- Fostering of national or international amateur sports
- Literary
- Prevention of cruelty to animals and children
- Religious
- Scientific
- Testing for public safety
Charities, foundations, and nonprofits can gain 501(c)(3) status if they satisfy IRS tax rules. These philanthropic entities can include private foundations, community foundations, corporate foundations, limited liability companies, donor-advised funds, and even crowdfunding campaigns.
The nation’s top 100 charities received more than $61 billion in private donations in 2023. They include Feeding America, United Way, St. Jude Children’s Hospital, Salvation Army, Habitat for Humanity, Goodwill, YMCA, and the Boys & Girls Clubs of America.
Charities and Taxes
The decision to make a charitable donation can be motivated by altruism, financial considerations, or a little bit of both. These donations can take the form of accounts, tangible personal property, and real estate. A donor can even choose to leave all of their money and property to charity at their death.
A gift made during a donor’s lifetime can result in an income tax deduction, provided that the charity is an IRS tax-exempt organization. For cash contributions, eligible itemized deductions for charitable contributions can be made up to a certain percentage of the donor’s gross income. Limits also apply to gifts of appreciated securities or property in a single year.
There may be further limits on charitable gifts depending on how they are given (i.e., directly to a charity or a private foundation, or using other strategies, such as a donor-advised fund). Appreciated securities may additionally bypass the capital gains tax if they are given to a charity during a donor’s lifetime.
When charitable gifts are part of an estate plan and transferred to the charity upon the donor’s death, they can remove money and property from the donor’s taxable estate, thereby lowering the donor’s estate tax liability, if one exists. There is an unlimited charitable deduction for estate plan gifts to charities. Gifts of this type can take several forms, including charitable trusts, retirement accounts such as individual retirement accounts and 401(k)s, and gifts made via charitable foundations and donor-advised funds.
What to Know Before You Give
While it may be better to give than to receive, donors who plan to make a large charitable gift during their lifetime or at their death should temper their generosity with caution. Here are some things to look out for:
- Make sure the organization you donate to is a reputable charity and not a scam. Charity fraud—schemes that seek donations for fake charities—can take many forms. Charity scams proliferate on the internet, particularly on social media. They can also involve emails, text messages, crowdfunding platforms, and phone calls. Be sure to thoroughly vet an organization before donating. Look for red flags such as time-urgent pitches and names and website addresses that closely mimic real charities.
- Check that the charity qualifies for a tax deduction. Charitable donation tax breaks provide an extra incentive to support a good cause. The IRS provides a search tool for groups that are eligible to receive tax-deductible charitable contributions.
- Can you afford it? Charitable giving is not solely an activity of the rich. Households earning $40,000 or less give money with lower frequency than those households with higher incomes, but only by about 20 percentage points. Tax breaks are just one consideration for charitable giving; many people donate to charity for primarily altruistic reasons. However, the gifts should not come at the expense of your financial security. Experts recommend starting with 1 percent of your income and, if you can afford more, working your way up from there.
Get Estate Planning and Tax Advice Before Giving
It is not too late to make philanthropy a part of your legacy, but whether you are new to charitable giving or want to step up your gifts, there are strategies to follow that can increase the value of your charitable efforts.
However you plan to give and whoever you plan to give to, the rules around charities can be complicated and options abound. For professional advice about giving to charities, choosing what and where to donate, and the different gifting strategies that are available, schedule a consultation with our estate planning attorneys.
Call Santaella Legal Group, serving all of California, at (925) 831-4840, or reach out to us here.