Maximizing Charitable Giving: Strategies, Pitfalls, and Tax Benefits
First, I want to give a bit of background here, so you know my perspective.
I've been on both sides of the table when it comes to charitable giving. I regularly help clients make their giving more effective and tax efficient. I've also helped some great organizations with their planned giving programs, and I've sat with them as they solicited donations. Beyond that, I've been a member of the National Association of Charitable Gift Planners, and I hold the Chartered Advisor in Philanthropy designation.
I’ve learned a few things worth sharing over the years.
First, I’ll explain why donors give. You might be surprised to learn that tax benefits are a secondary motive for most donors.
Second, I'll break down the 3 most common mistakes I see in charitable giving. Luckily, they're almost all simple fixes.
Third, I’ll show you the most effective philanthropic planning strategies I’ve seen. These are the strategies that I use most often with my clients.
Why Donors Give
The science behind planned giving is fascinating. Psychologically, we are predisposed towards altruism because of evolution and because it simply makes us happy. It’s intuitive that giving makes us feel good, most people can empathize with that through their own experiences. The idea that giving is an evolutionary trait is a bit more counterintuitive.
While we think of evolution as a Darwinian survival of the fittest individuals, in which the weak are culled and the strong survive, it doesn’t only apply solely to individuals. Survival of the fittest also applies to civilizations. Cooperation and generosity are evolutionary ideas by which the strong have supported the weak, which strengthens the group as a whole. In a counterintuitive way, the strong supporting the weak strengthens the entire society.
Generosity also has roots in the idea of kin selection, where individuals place the good of a small group of related individuals over their individual success. In this way, the family group survives, as does the bias towards generosity, even if the individual’s success isn’t maximized.
Giving makes us feel good, that isn’t a revolutionary statement. But why does it elicit an emotional response? Giving to others triggers a release of endorphins in our brain, similar to that from a runner’s high. Realizing this makes it easier to understand why you feel good after you’ve helped someone else. It’s been theorized that this neurological response developed along with the evolutionary move towards generosity.
According to the 2016 US Trust Study of High Net Worth Philanthropy, most donors give for the same reason that I give to St John Center: they believe in the mission of the organization and they believe that their gift can make a difference.
There are many reasons why you might choose to give to a nonprofit, but most of the reasons can be broken down into a few major categories.
· Because you believe in the mission of the organization
· Because you believe that your gift can make a difference
· Support organizations with whom you’re involved
· To give back to your community
· Out of religious belief
· Out of political or philosophical belief
· In response to a need
· Because you were asked
· Tax benefits
Believing in the mission and impact of an organization
Believing in the mission of the organization and believing in their impact are highly related. In fact, they go hand in hand. If you don’t believe in the mission of the organization, their impact probably isn’t of consequence to you. Likewise, if you don’t believe an organization is able to make an impact, it doesn’t matter how much you believe in their goals.
Donors feel empowered when they believe their gifts are making an impact. In fact, almost all giving can be traced back to impact. When you break it down, almost all giving is due to impact. Without impact, few of the other reasons matter. If an organization doesn’t actually make an impact, they’ll eventually lose their support. I’ve seen many donors stop donations to a group because they felt their donations weren’t making a difference. Sometimes their donations were used ineffectively, sometimes the impact just wasn’t being communicated well enough to the donor. Either way, when donors feel that they’re not making an impact, they often look to make a change.
It's likely that mission and impact coexist with each of the other reasons for giving on this list. At the root, mission and impact must align with any gift that you want to make. Whether that’s giving to a church or your alma mater, you have to believe in their mission and the impact that they have on others. Without that alignment, your connection to an organization is essentially irrelevant.
To support organizations with whom you’re involved
One of the most common reasons behind giving to the same causes is a personal connection. This can be donating to your alma mater, supporting the Boy Scouts, or maybe the local bar foundation. When donors give to the same organization year after year, it’s often because the donor has benefitted from the organization’s work, or they’ve seen the work up close.
This can really be broken down into two different underlying reasons. The first is because you’ve had a positive experience with an organization in the past. Maybe your college prepared you for a successful career. Maybe you were an Eagle Scout and that’s benefitted you throughout your life. Or maybe you had a great experience at a summer camp, which was foundational to your growth. I attended a summer program which was foundational to my development when I was 17, the Kentucky Governor’s Scholars program. I made lifelong friends there that I still talk to on a daily basis, decades later. Maybe you have had a similar experience.
The other reason here is because you’re currently involved with an organization, whether that’s as a volunteer, a board member, or in another way. High net worth individuals are twice as likely as the general population to volunteer their time, with 49.7% of HNWI’s volunteering annually. The correlation between volunteering and giving is incredibly strong as well. Only 15.7% of volunteers reported that they didn’t also support organizations financially. Finally, when you compare average donations by HNWI’s, the average contribution to a group at which one volunteers is nearly 56% higher than the average contribution made by someone who doesn’t volunteer for that organization.
This difference in financial support goes back to mission and impact. When you see the impact made by an organization, it’s easier to understand how they’re going to use more funds to further their mission. You feel invested in their success, both financially and in sweat equity.
Let me tell you about one of my favorite nonprofits, the St John Center. The St. John Center provides services ranging from helping clients obtain documents like Social Security cards, ID’s, and birth certificates to employment and housing. During 2021, over two thousand clients received services at the St John Center. I see the impact they have on their clients, gentlemen who have been forgotten by the system and who have often fallen between the cracks.
I give on a monthly basis. They’re one of the only organizations I give to regularly. I also volunteer there every week. Why do I donate to them? I give to them because I see the impact they have on the lives of their clients. They help men find jobs and housing. They help with documents. They even help men find drug rehabilitation. More than all that, they help men regain their dignity. Something as simple as a shower and a place to get clean can make a huge difference in making one feel human again.
Where Charitable Gifts Go Wrong (& why Philanthropic Planning is so valuable)
I see the same three mistakes over and over, so I think they’re worth mentioning.
Shotgun gifting is making donations without an overall strategy. This ends up being a large number of smaller gifts, which dilutes the overall effect.
Not being involved. If you’re making a major gift, you should work with the charity to ensure that your gift fits the needs of the charity. After the gift, you should stay involved so you can see the fruits of your donation.
Not considering the tax impact. Not all donations have the same tax implications. If you’re thinking of making a larger gift, you need to talk with your tax advisor about how to best structure the gift to get the most tax benefit.
How to structure charitable gifts for maximum impact
As I mentioned, not all gifts are taxed the same. I see many, many donors writing checks each year, and this is rarely the best option to maximize your tax benefit.
I do need to mention that I do realize that tax benefits aren’t the main reason for most gifts. The benefit to being tax aware in your giving is that you can give more to charity, without increasing the amount coming out of your pocketbook
So back to cash gifts. The issue here is that most people, particularly retirees, aren’t able to itemize their tax deductions. This could be an entire newsletter but in short, most folks don’t have enough deductions to justify anything other than the standard deduction. If you can’t itemize your deductions, you can’t deduct that donation.
So, let’s talk about ways to give while still getting a tax benefit. Here are my three favorite strategies.
Option 1: Donating Appreciated Stock
Do you have a stock position in your portfolio that you’re afraid to touch because of the capital gains?
It might have been gifted stock that has a low carryover basis or maybe it was stock that you purchased while working for a previous employer. Either way, you’re currently sitting on potential capital gains taxes that you would rather avoid.
One solution would be giving the appreciated stock to charity. Gifting appreciated stock generally allows you to take a deduction for the fair market value of the stock while avoiding the capital gains taxes; the charity is then able to sell the stock for its full value.
You save money on taxes and your favorite charity receives more than if you had sold the stock and donated the proceeds. It’s a win-win!
Option 2: Qualified Charitable Distributions
Are you over 72 and facing Required Minimum Distributions from your IRA?
Maybe your expenses are covered by pensions or Social Security income, and you don’t want to pay taxes on the extra income from RMDs. A Qualified Charitable Distribution (QCD) could be a great option.
A QCD allows you to donate the amount of your RMD directly to a charity rather than take it as income. This benefits you by excluding the RMD amount from your gross income, as well as keeping you from potentially being pushed into a higher tax bracket.
If you have an advisor, make sure they know you want the check to go directly to the charity. If the check is made out to you, then it won’t count as a QCD, and you’ll be taxed on the withdrawal.
Option 3: Gift Bunching using a Donor Advised Fund
Have you heard of gift bunching into a Donor Advised Fund (DAF)?
Instead of making annual charitable donations, gift bunching involves contributing a larger amount in a single year to a DAF, which enables donors to exceed the standard deduction threshold and thus itemize their deductions in that year, potentially providing significant tax savings.
This fund acts as a charitable savings account, allowing donors to distribute the gifted funds to their chosen charities over time, at their own pace. This means, in the years they do not contribute to the DAF, they can still make charitable gifts from the fund, ensuring continuous support to their favorite charities.
Hence, gift bunching enables donors to optimize their tax deductions, maintain their charitable giving patterns, and add a level of strategic planning to their philanthropic activities.
There are many ways to give to charity, which makes it important to find the giving strategy which works best for you. Depending on the size of the gift, these decisions can make a large impact on the tax benefits available.
While giving is about much more than just tax benefits, being tax aware allows you the ability to make your giving go further.
Qualified Charitable Distributions (QCDs)
What’s a QCD? What are the benefits?
The Qualified Charitable Distribution (QCD) allows people over 70.5 to give up to $100,000 per year directly to charity. The amount of the QCD counts towards your yearly Required Minimum Distribution (RMD), lowering the required distribution dollar for dollar, potentially to zero.
Here’s the situation I see pretty often. A client isn’t ready to begin taking distributions from their IRA at 72 / 73. Maybe they have a pension or other income that, along with Social Security, covers their spending needs. They live comfortably without drawing from their IRAs and paying the associated income taxes. They probably have a couple charities they support regularly, or they tithe at their church.
I have several clients like this and many of them use QCD’s as their main form of giving.
With a bit of planning, they can continue their donations, while keeping from taking a tax hit from an RMD that they don’t need. It’s often a win-win situation for everyone.
In the past, it occasionally made sense to take the RMD and then write a check to charity. The donation would count towards itemizing tax deductions. While this is still possible, most retirees are finding it harder to find enough deductions to make itemizing deductions worthwhile. With the higher standard deduction, now $27,300 for couples over the age of 65, most folks just don’t have that much to deduct.
When clients do elect to itemize, they often find that donations don’t give them a dollar for dollar deduction because slippage. Slippage is just the difference between the deduction you expect and the deduction you get. This slippage comes from potential paying more in
Social Security tax, the phaseout of itemized deductions, the addition of a 3.8% Medicare surtax or increases in cost for Medicare Parts B and D through IRMAA.
Giving through a QCD bypasses all these issues, plus it provides a tax benefit by keeping the amount of the distribution from ever showing up as income. There is no issue with slippage when using a QCD.
Let’s look at a Qualified Charitable Distribution example
Bill and Betty are 72 years old. Between the two of them, they have $45,000 of Social Security benefits, $20,000 of portfolio income, $40,000 from Andrew’s military pension, and Andrew faces a $29,296 RMD from his $750,000 IRA. In addition, the couple wish to make a significant bequest to their alma mater this year and have pledged a $29,296 donation (to offset their looming RMD obligation).
If the couple gives the $29,296 QCD directly to the charity, the couple’s AGI is $20,000 (portfolio income) + $38,250 of taxable Social Security benefits + $40,000 pension = $98,250. Their itemized deductions include paying $3,500 in state income taxes, $2,000 in property taxes, and $8,000 in investment management fees (which are limited to $7,035 in excess of the 2%-of-AGI floor). Thus, their total deductions are $12,535, less than the $27,300 standard deduction. With the standard deduction, their taxable income is $70,950. Based on the 2018 married filing jointly tax tables, this puts the couple in the 12% tax bracket, with a total tax liability of $8,513.
If the couple instead decided to take the RMD and then donate the same $29,296 to charity, their situation would look like this:
The couple’s AGI is $20,000 (portfolio income) + $38,250 of taxable Social Security benefits + $40,000 pension + $29,296 (RMD) = $127,546. Their itemized deductions include paying $3,500 in state income taxes, $2,000 in property taxes, and $8,000 in investment management fees (which are limited to $7,035 in excess of the 2%-of-AGI floor). They would also deduct the $29,296, subject to the 2% of AGI floor, leaving a deduction of $26,745.08. Thus, their total deductions are $39,280.08, making their taxable income $88,265.92. Based on the 2018 married filing jointly tax tables, this puts the couple in the 12% tax bracket, with a total tax liability of $11,297.50.
By using a QCD for their donation, they saved an additional $2,784.50, with no extra work.
How do you set up a QCD?
The mechanics of making a Qualified Charitable Donation are simple.
All you need to do is direct your advisor to send a check from your IRA to you, with your desired charity as the recipient. You can then forward the check to the charity. Likewise, some firms will send the check directly to the charity.
At the end of the year, you will need to let your tax preparer know the amount which was transferred as a QCD. You will still get 1099-R from your custodian which shows the distributed amount; you’ll just give your tax preparer a copy of your receipt from the charity showing how much you contributed, and you should be set.
One thing to note is that the check must be made out to the charity directly. If the check is made out to you, you will be taxed on that amount.
Charitable Distributions in Short
If you’re over age 70.5, you should likely be using a QCD as part of your withdrawal strategy.
If you aren’t there yet now is a good time to begin thinking about how you can position yourself to take advantage of these rules in the future.
Start by looking at how much you have saved in tax-advantaged accounts and then think about your plan for turning your savings into income that can support your retirement lifestyle.
By using, or preparing to use, a QCD, you can meet your RMD requirement and support your favorite charities, all while saving money on taxes both today and into the future.
Donor Advised Funds (DAFs)
Are you unable to itemize your charitable contributions?
Let's consider Bob, a generous individual who donates $12,000 each year to his church. Despite his charitable nature, Bob doesn't get any tax deductions for his donations. Why? Because with the current standard deduction levels, his annual giving isn't enough to justify itemizing his tax returns.
The Solution: Donor Advised Fund
A Donor Advised Fund (DAF) acts like a charitable bank account that allows you to make donations and get tax deductions in a more flexible manner. Here's how it works:
Initial Donation: Bob can take three years' worth of his annual donations, which amounts to $36,000, and contribute it to a Donor Advised Fund.
Tax Deduction: By doing this, Bob can itemize his deductions and claim the $36,000 in the year he makes the initial donation to the DAF.
Scheduled Giving: In the subsequent years (2022, 2023, and 2024), Bob can direct the DAF to give $12,000 each year to his church, just as he was doing before.
No Change for the Recipient: The church continues to receive the same annual donation from Bob, with no interruption or change in the amount.
The Benefits of Charitable Giving
Maximized Tax Deduction: Bob gets to claim a significant tax deduction in the year he contributes to the DAF.
Flexibility: Bob has the flexibility to direct the funds to his church or any other charitable organization over the years.
Simplified Record-Keeping: All donations are consolidated into one account, making it easier for Bob to manage his charitable giving.
IRS is the Only Loser: The only entity that misses out on this arrangement is the IRS, as Bob is now able to claim a deduction, he otherwise wouldn't have been able to.
Charitable giving is not just about generosity; it's also about smart financial planning. A Donor Advised Fund offers a win-win solution for both the donor and the recipient. If you're in a similar situation as Bob, consider talking to a tax advisor to explore how a Donor Advised Fund can benefit you. Remember, if you're giving, make sure you have a plan to make the most out of it.
Gifting Appreciated Assets
Donating appreciated stocks or real estate directly to a charity or through a DAF can provide significant tax benefits. This strategy allows the donor to avoid capital gains taxes on the appreciated value while still receiving a deduction for the full market value of the asset.
Philanthropic Planning Case Study: From Faulkner to Stull & Troye
John grew up in Lexington and was interested in art from an early age. During the 1990s, when John was in his 30’s, he became enamored with Henry Faulkner’s work. As Faulkner was well known around Lexington and folks didn’t value his pieces at the time, he was able to acquire 10 pieces for relatively little.
Fast forward 30 years and his Faulkners have appreciated significantly while John’s taste has evolved. His collection now features confirmation paintings by Richard Stone Reeves, Henry Stull and Edward Troye, among other equine artists.
John has always given to charity and makes annual gifts to the Filson Club in Louisville and Old Friends in Georgetown.
During a recent meeting with his financial advisor, John mentioned the idea of selling all 10 Faulkners and donating the proceeds to his favorite charities.
His advisor recommended a different path. He suggested John donate the pieces to his Schwab Donor Advised Fund and then gift the proceeds from the DAF. This would allow him to avoid the 31.8% tax he would otherwise owe on the sale of the art (28% capital gains rate on art and 3.8% net investment income tax)
Breaking down the options:
Option 1: John sells the paintings on his own, pays capital gains taxes on the appreciation, pays the sales expenses, and then donates the remainder to charity.
Option 2: John donated the paintings to his Donor Advised Fund, who then sells the painting for him. When the paintings have sold, John can donate the proceeds to charity.
The difference between the two is pretty drastic. Donating the paintings to the DAF is a net tax benefit, whereas selling and then donating the proceeds ends up increasing John’s tax bill for the year. On top of that, John’s favorite charities will receive an additional $126,000, money I’m sure they can put to good use.
The Related Use Rule for Art Donations:
When donating art or collectibles, the IRS’s related use rule is key for determining your charitable income tax deduction. Basically, you get to deduct more of your contribution if the donated item is used by the receiving charity in a way that is related to the charity’s purpose.
For example, if you donate a piece of artwork to an art museum, you can deduct the full fair market value of the art.
If you give art or collectibles to an organization that doesn’t meet the related use rule, your deduction is limited to the lesser of the fair market value or your cost basis. Likewise, if the organization plans to sell the artwork immediately, your gift won’t count as a related use.
I showed the potential benefits of gifting through a Donor Advised Fund in the case study above, but I want to note that a big exception to using a DAF is when your gift would qualify under the related use rule. If it qualifies there, it’s usually better to give the gift directly to the organization.
For example, Anna wants to donate an early-Kentucky bandy-leg chest to Locust Grove. Locust Grove, as a house museum, wants to put the piece on display. Anna bought it at a flea market for $200 and it’s currently worth $6,500.
Giving the piece directly to Locust Grove would allow Anna to deduct the fair market value of $6,500.
If she donated it to a Donor Advised Fund, she could only deduct her basis, $200.
Annual Deduction Limits for Art Donations:
I’m not going to get too deep into this. Just know that the amount of charitable deductions you can take claim each year is limited to a certain percentage of your income and that percentage is based on the type of donation. In my experience, this limit is rarely an issue. When it does come up, it’s because of an exceedingly large gift or an extremely low taxable income. In either case, any deduction that is disallowed in the current year can be carried forward for up to five years. You don’t just lose the deduction.
Qualified Appraisals for Art Donations:
While Goodwill gives blank receipts and allows you to fill in the value of goods you donated, that doesn’t work for art or collectibles.
If your donation is worth $5,000 or more, you’ll need to get a qualified appraisal by a professional and that appraisal must be included with your tax return. The appraisal should be completed within 60 days of the donation and before you file your tax return for that year, including any extensions.
If the donation is worth more than $500 but not over $5,000, the taxpayer must instead complete a Form 8283, Noncash Charitable Contribution, Section A, and attach it to their tax return.
Minimizing Estate Tax Exposure with Art Donations:
Right now, estate taxes are rarely an issue since the estate tax exemption is $13.61 million per person. As it stands, that exemption will drop to $7 million per person in 2026, at which point the number of folks affected will be significantly higher.
Art and other collectibles matter because they’re included in the gross valuation of your estate, on which your estate taxes are based. For estates exceeding the federal exemption amount, the excess is taxed at a top federal rate of 40%, excluding potential state taxes.
Donating art during your lifetime will remove it from your gross estate and can reduce your estate tax exposure.
Federal Historic Tax Credits
Over the last decade, I've volunteered with the Blue Grass Trust for Historic Preservation and I've been on the board of directors for the Kentucky Trust for Historic Preservation. Through my experience, I've gained a working knowledge of historic rehabilitation tax credits that I want to share. I've had this conversation with clients on several occasions, as many of my clients have an interest in history and their own historic homes.
Historic tax credits are a fantastic and yet misunderstood option for property owners. The tax credit, which can total 40% or 50% of qualified expenses between state and Federal incentives, can be an incredibly valuable tool to make preservation projects economically viable.
Too often, historic preservation is hard to justify on solely the economic basis of a project. Tax credits provide an added incentive which can make projects economically viable that might not have been otherwise, thereby protecting our cultural heritage.
Historic tax credits can be a confusing topic. Often, I find that property owners are intimidated by the red tape and decide that the credits aren’t worth the hassle. The downside to that decision is the potential loss of a credit covering (up to) 40% or 50% of rehabilitation costs. That can be huge.
My goal is to explain the types of credits available, what properties and expenses qualify for credits, and then break down the process of applying for credits. I’ll also be including links to some helpful resources.
Understanding Federal Historic Tax Credits
Federal historic tax credits are a part of the Historic Preservation Tax Incentives Program, which is administered by the National Park Service (NPS), along with the Internal Revenue Service (IRS). The program is designed to encourage the preservation and rehabilitation of historic buildings that contribute to the cultural and architectural heritage of communities across the US. By offering these tax credits, the federal government is incentivizing property owners to invest in the maintenance and renovation of their historic properties.
These tax credits provide substantial financial incentives specifically for the rehabilitation of historic, income-producing buildings. Eligible properties must be listed on the National Register of Historic Places or be located in a registered historic district. The tax credits cover 20% of the qualified rehabilitation expenses, which significantly reduces the out-of-pocket cost to property owners. This makes restoration economically viable. As a result, historic buildings can be repurposed, which contributes to economic development and urban revitalization. Not to mention, it’s significantly more environmentally friendly to rehabilitate an existing building than to build a new one.
Federal historic tax credits provide more than just financial savings for property owners. Historic buildings are windows to another time, allowing us to connect with those who came before us. These buildings are often cornerstones of local architecture and typically have played significant roles in their communities. They play a crucial part in maintaining the identity and culture of historic neighborhoods, attracting tourists, and fostering community pride.
The restoration of historic buildings often begins a cycle of increasing property values in historic neighborhoods. When looking at my own community in Louisville, neighborhoods like NuLu and Germantown have become popular in part due to investments driven by historic tax credits.
Federal Historic Tax Credit Eligibility
Before we go any further, I want to explain what type of properties qualify for historic tax credits. You’ll notice that there are separate criteria for state and federal credits. Each entity has different criteria, so it’s important to make sure that you’re eligible for each credit for which you want to apply.
To qualify for Federal historic tax credits, properties must meet specific criteria:
Certified Historic Structures: The building must be listed on the National Register of Historic Places or located in a registered historic district and certified as significant to the district's historic nature.
Income-Producing Properties: Only buildings used for income-producing purposes, such as commercial, industrial, agricultural, rental residential, or other business-related activities, are eligible.
Additionally, the rehabilitation work must be certified as consistent with the historic character of the property and, where applicable, the district in which it is located. Certification is granted by the Secretary of the Interior through the NPS.
Kentucky Historic Rehabilitation Tax Credit Eligibility Criteria:
Properties must be listed in the National Register of Historic Places or located in a National Register district.
Properties can be owner-occupied or income-producing. Additionally, properties owned by non-profit organizations are eligible for credits, which they can then transfer or sell.
Types of Historic Tax Credits Available
Federal Rehabilitation Tax Credit:
· This credit covers 20% of the qualified rehabilitation expenditures for certified historic structures.
· Qualifying expenses include costs related to the building’s structural and architectural integrity, but exclude acquisition, furnishing, and new construction expenses.
Kentucky Historic Rehabilitation Tax Credit
· 30% of qualified rehabilitation expenditures for owner-occupied properties
· 20% of qualified rehabilitation expenditures for income-producing and non-profit owned properties.
Historic Tax Credit Application Process
Applying for federal historic tax credits involves a multi-part process:
Part 1: Evaluation of Significance
Determine if the property is a certified historic structure. This involves submitting the property for listing in the National Register or verifying its status in a registered historic district.
Part 2: Description of Rehabilitation
Provide detailed plans for the proposed rehabilitation, demonstrating how the work will comply with the Secretary of the Interior’s Standards for Rehabilitation. The NPS reviews this part to ensure that the proposed work maintains the building’s historic integrity.
Part 3: Request for Certification of Completed Work
After completing the rehabilitation, submit a request for certification to confirm that the work was done as approved. The NPS will review and, if appropriate, certify the completed project.
Required documentation includes various forms from the NPS and IRS, such as the Historic Preservation Certification Application (Parts 1, 2, and 3) and relevant IRS tax forms.
Kentucky utilizes a process similar to the Federal approach, involving a three-part application reviewed by the Kentucky Heritage Council. For detailed instructions, including forms, click here to visit the website of the Kentucky State Historic Preservation Office.
Compliance and Requirements
The rehabilitation must adhere to the Secretary of the Interior’s Standards for Rehabilitation, which emphasize retaining and preserving the building’s historic character and materials. Common compliance issues include inappropriate alterations or additions that compromise the building’s integrity.
It is important that you understand and follow these standards to avoid jeopardizing the tax credit.
Financial and Tax Implications
The tax credits work by allowing property owners to reduce their income tax liability by a percentage of the qualifying rehabilitation expenditures.
With a 20% credit, if you spend $250,000 on qualifying rehabilitation, you could receive a $50,000 tax credit.
Combining federal historic tax credits with other incentives, such as state tax credits and grants, can significantly enhance the financial viability of a project. However, you need to know that there is typically a recapture provision, which may require repayment if the property is sold or ceases to be income-producing within five years.
If you have specific questions on your project, I suggest bringing on a consultant who specializes in historic preservation tax credits. This is a very niche area, and the advice of an experienced professional can make a world of difference. If you need help finding a consultant, I suggest reaching out to your local SHPO for a recommendation.
Benefits Beyond the Tax Credit
Historic rehabilitation projects offer several benefits beyond the immediate financial incentives:
Economic Benefits: Projects create jobs, stimulate local economies, and increase property values.
Environmental Benefits: Reusing existing buildings conserves resources and reduces the environmental impact associated with new construction.
Cultural and Educational Benefits: Preserving historic buildings maintains the community’s cultural heritage and provides educational opportunities.
Resources and Support
Numerous resources are available to help navigate the application process:
National Park Service (NPS): Provides detailed guidelines, forms, and examples.
Kentucky State Historic Preservation Office (SHPO): Offers assistance and information on state-specific incentives.
Professional Consultants: Experts in historic preservation and tax credits can provide
Federal historic tax credits provide vital support for preserving America’s historic buildings, offering financial incentives that make rehabilitation projects more viable. By understanding the eligibility criteria, application process, and compliance requirements, property owners can successfully navigate the system and reap the benefits of these valuable programs. Combining federal and state credits, such as those available in Kentucky, further enhances these opportunities, contributing to the preservation of our shared heritage for future generations.
Conclusion
Effective charitable giving involves more than just writing a check. By understanding common pitfalls and leveraging strategies like QCDs, DAFs, and the donation of appreciated assets, donors can maximize their impact while also optimizing their tax benefits. Charitable giving is both an art and a science, and a well-planned strategy ensures that your generosity has the most significant possible effect.
If you want to explore these strategies further, consider consulting with a tax advisor or financial planner experienced in philanthropic planning. Start today to maximize both the impact of your gifts and your financial benefits.
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