By David A. Seeley, CPA, Beth Moore & Associates, CPAs
If philanthropy is important to you, you probably make regular charitable donations. You may also have established a non-grantor trust. Such trusts can help you make charitable gifts that provide greater tax benefits than you’d receive for individual donations. Of course, you don’t give to charity simply for the tax deductions. But there’s nothing wrong with getting the most bang for your buck. Here’s how individual and trust donations differ — and how their differences can guide you in making charitable giving decisions.
Itemizing deductions. Generally, you’re permitted to deduct charitable donations for federal income tax purposes only if you itemize (as opposed to taking the standard deduction). There was a limited tax break for non-itemizers who made cash gifts to charity in 2020 and 2021, but it has expired.
Itemized charitable deductions for cash gifts to public charities normally are limited to 50 percent of adjusted gross income (AGI) and cash gifts to private foundations are limited to 30 percent of AGI. However, the Tax Cuts and Jobs Act increased the limit for cash gifts to public charities to 60 percent through 2025.
Noncash donations generally are limited to 30 percent of AGI for donations to public charities and 20 percent for donations to private foundations. If you donate appreciated long-term capital gain property to a public charity, you’re generally entitled to deduct its full fair market value, but with the exception of publicly traded stock, deductions for similar donations to private foundations are limited to your cost basis in the property. Deductions for ordinary income property — including short-term capital gain property — are limited to your cost basis, regardless of the recipient.
Several advantages. The discussion that follows focuses on non-grantor trusts. Because grantor trusts are essentially ignored for income tax purposes, charitable donations by such trusts are treated as if they were made directly by the grantor, subject to the rules applicable to individual donations. Also, this column doesn’t discuss trusts that are specifically designed for charitable purposes, such as charitable remainder trusts or charitable lead trusts.
Making charitable donations from a non-grantor trust may have several advantages over individual donations. These include the ability to claim a charitable deduction even if you don’t itemize deductions on your individual income tax return and the ability to deduct donations to foreign charities. Non-grantor trusts can deduct up to 100 percent of their gross taxable income, free of AGI-based percentage limitations. In addition, trust deductions can be more valuable than individual deductions because the highest tax rates for trust income kick in at much lower income levels. For example, in 2022, trusts reach the highest tax bracket (37 percent) at only $13,451 of income.
A few caveats. If you’re contemplating making a charitable donation from a trust, there are a few caveats to keep in mind. First, your trust instrument must authorize charitable donations. Also, your donation must be made from (that is, traceable to) your trust’s gross taxable income. This includes donations of property acquired with such income, but not property that was contributed to the trust. And, unlike certain individual charitable donations, deductions for noncash donations by a trust generally are limited to the asset’s cost basis.
Note that special rules apply to trusts that own interests in partnerships or S corporations, as well as to certain older trusts. (Generally, these are trusts created on or before October 9, 1969.)
Keep your options open. In general, the ability to make charitable donations from a non-grantor trust appeals to individuals who can’t benefit from itemized deductions because they’ve run up against income limits or other restrictions. You may also want to look at trusts that are designed to make charitable donations. These trusts provide certain tax benefits and may offer other features, such as a lifetime income stream. Discuss options for your individual circumstances and charitable objectives with your tax advisor.
David A. Seeley, CPA, MTax is tax director with Beth Moore & Associates, CPAs. He can be reached at 757-224-1174 or by email at David@bethmoorecpa.com.