Can Charitable Donations Help Reduce Estate Tax?

 

Charitable donations can serve both a moral and financial purpose. For those considering leaving a part of their wealth to charitable causes upon their passing, there’s a dual benefit: making a meaningful impact and potentially saving on estate taxes. Here’s a deeper dive into how the two relate.

Understanding Estate Tax vs. Income Tax

The federal estate tax and income taxes are calculated differently. Each has its own rules, especially when considering deductions related to charitable giving.

• Income Tax Charitable Deduction: It can be complex to determine exactly how much tax you’ll save by making a charitable donation.
• Estate Tax Charitable Deduction: Simpler in comparison, the amount you donate to charity results in a direct, dollar-for-dollar reduction in your gross taxable estate.

The Power of Charitable Deductions on Estate Tax

To put things into perspective, consider an estate worth $20 million. If you die in 2023, with a full lifetime exclusion of $12.92 million available, then $7.08 million of your estate will be exposed to the estate tax. 40% of this amount, roughly, will be taxable, resulting in an estate tax of about $2.8 million.

However, by incorporating charitable gifts into your estate planning:

1. Dollar-for-Dollar Reduction: If your $20 million estate has a $5 million charitable bequest, you receive a $5 million deduction. This means only $15 million is exposed to estate tax, lowering your taxable amount significantly.
2. Eliminating Estate Tax: By donating the necessary amount to charity (in this case, $7.08 million), you could eliminate estate tax entirely.