Benefits of Charitable Giving

What Is the Purpose of Charitable Giving?

Charitable giving is a major force in the United States, with more than 1.5 million organizations that include grassroots local charities, hometown churches and fraternal organizations as well as heavily endowed philanthropic foundations such as the The United Way. Together, they sponsor countless forms of outreach to the sick, the needy and those in search of opportunity.

Charitable giving enables the construction of hospitals and libraries, restoration of local historical sites and direct monetary aid, to name just a few possibilities. No matter what you're most passionate about, you can probably find one or more charitable organizations to support in pursuit of a cause you believe in.

Support doesn't have to take the form of money, either. While charitable giving is most often measured in terms of cash donations, charitable giving also encompasses gifts of material goods and food items, and the volunteering of time, energy and, in the case of the American Red Cross, even blood.

Does Charitable Giving Reduce Taxes?

To encourage charitable giving, the federal government rewards taxpayers by allowing deduction of many charitable gifts from federal income taxes.

In 2021, as the COVID-19 pandemic continued, the IRS urged taxpayers and businesses to donate to qualified charitable organizations to help those struggling with pandemic-related financial troubles and food insecurity. The IRS also extended a temporary rule created by Congress in 2020 that makes it easier for many taxpayers to deduct charitable contributions from their 2021 income taxes: Normally, deductions for charitable contributions only benefit the 10% of taxpayers who itemize their deductions instead of taking the standard deduction available to every taxpayer. Under the temporary rule, individual taxpayers who take the standard deduction can also take an additional deduction of up to $300 for charitable contributions made in 2021. Married couples filing jointly can take charitable deductions of up to $600 in addition to the standard deduction.

For a donation to be tax-deductible, it must go to an organization registered with the IRS as a tax-exempt entity. This tax-exempt status applies to a variety of charities, religious groups, private foundations, political organizations and other nonprofits such as labor organizations and business leagues. The IRS provides an online tool that can help you identify organizations that qualify.

Aside from income tax deductions, the IRS also supports charitable contributions through opportunities for estate tax savings. Qualified bequests to charitable organizations, in any amount, made through a person's will are exempt from estate taxes. This makes charitable contributions an important component of estate planning for many individuals and married couples.

How Much Should I Donate to Charity?

Deciding which charities to support, and how much to give them, is very much a personal decision for you and your family. A few questions to ask yourself:

• Are your household expenses covered? It may seem obvious, but charity begins at home, so make sure your household necessities are met and that you have a healthy emergency fund set aside before dedicating any sizable portion of your income to charity. Falling behind on bills can result in consequences, including credit score impact.
• Are your retirement savings in good shape? Before shifting money toward charitable giving, make sure you're on track to meet your retirement goal.
• How else can I support worthy organizations? If your discretionary spending doesn't allow for cash donations at this time, consider the many other ways you can support causes you support.

If monetary contributions aren't in the cards right now, volunteering time and effort can make a big difference for organizations in your community—and help you see the impact of your efforts firsthand. You may also be able to make non-cash donations such as handmade items (hats, mittens or socks, for example), gently used clothing, bedding and other linens, and even credit card points.

Use Discretion When Giving

When contributing your hard-earned money to any organization, it's prudent first and foremost to ensure the charity is legitimate. Scammers are endlessly inventive and more than happy to take advantage of your generosity. If you receive a phone call from someone purporting to represent a charity, ask plenty of questions. If the caller can't give a straight answer, hang up. Even if you're convinced of their mission, ask them to send you more information by mail and mail them a check, or visit the organization's website yourself if you prefer to make an online donation. Before you do, check the IRS charitable organization search tool to confirm the organization's tax-exempt status.

Even when you're certain a charity is legitimate, it's reasonable to want your donation to be used wisely, and websites such as GuideStar and Charity Navigator can help in that effort. These sites enable you to investigate how charitable organizations manage the donations they receive and the different programs they provide. They can help you understand how much of an organization's budget goes toward administrative costs or marketing and fundraising efforts versus direct delivery of services, for example. Comparison such as these can be especially helpful when deciding among multiple organizations that support a cause you care about.

The Bottom Line

Charitable giving is an important element of civic life in America, and it can be a source of pride in advancing causes you believe in. (If it saves you some money in taxes, all the better.) Whichever way you contribute—in cash, volunteer time or other form of support—supporting a worthy cause can make your community and the world a better place.