Many professional athletes and NIL figures have started supporting various environmental or humanitarian causes that are close to their hearts. However, beyond their altruistic motives, the charity also presents a unique opportunity to maximize tax benefits.
We fully understand that this might not be your first priority while supporting a charitable cause, but learning about the potential tax advantages can further amplify the impact of your philanthropic efforts.
In this article, we’ll explore the various tax benefits a professional athlete can enjoy from their charitable giving and philanthropy. You will also learn some helpful strategies to navigate through various tax regulations.
Strategies for Athletes to Engage in Charity & Maximize Tax Benefits
Below are 9 strategies that will help you make a positive impact while also maximizing your tax benefits:
1. Identify the Cause
You should begin by identifying the cause you want to support through your charity. It can be something you’re passionate about or something that holds a personal significance.
For example, if you’re someone who prioritizes education, you can support charities that are working towards providing access to education for underprivileged children. Or, if you feel closely towards animals, you can support organizations working towards rescuing and protecting animals.
2. Find a Reputable Charitable Organization
Once you have finalized a cause you wish to support, you now need to find a charity that works for that particular cause and is also registered as a tax-exempt organization. This would ensure that your donations are being used exactly how you want and you’re also getting the maximum tax benefits.
Here’re a few things you can do when looking for a reputable and qualified charitable organization:
- Review their financial statements and annual reports to understand how they’re using their funds
- Assess their impact by reading success stories and testimonials from beneficiaries
- Verify their legitimacy and credibility by looking for reviews and media coverage
- Ensure that the charity is in compliance with the tax regulations to avoid any potential legal issues later
If you’re unsure whether the charity qualifies for a tax deduction, you can check the status of the charity using the IRS Exempt Organizations search tool. You can also contact the organization or the charity directly and inquire about their tax-exempt status.
3. Donate a % of Your Earnings
Most individuals prefer to donate a percentage of their earnings to support a charitable organization. These funds are helpful for organizations to sustain their ongoing programs or address urgent needs in the communities.
On the other hand, you’ll be able to deduct the donated amount from your taxes, as per the limits set by the IRS. In general, your deduction for charity cannot exceed 60% of your adjusted gross income. However, depending on the nature of your contribution, the deduction limit can also be reduced to a smaller percentage, like 20%, 30%, or 50% of your adjusted gross income.
You’ll have to examine the tax laws or consult with a tax company to understand your correct tax deductions.
4. Donate to Donor-Advised Fund
A donor-advised fund, also known as the DAF, is an account created by a sponsoring organization where you can deposit your assets for donation. It’ll give you an immediate tax deduction, reduce your capital gains taxes on assets, and potentially reduce your taxable income.
Furthermore, as a donor, you’ll be allowed to recommend how the sponsoring organization should invest the assets and where they should donate them. This will give you a level of control where you can support the charity or cause that best aligns with your philanthropic goals.
5. Sell Merchandise
You can sell certain products like t-shirts, hoodies, water bottles, or sports equipment and donate a portion of the sales to a charity. Then you can claim tax deductions for this portion of the sales that you have donated to the charitable cause.
It’s a great way to maximize your tax benefits and also encourage your fans or followers to support a good cause through their purchases.
6. Make In-Kind Donations
In-kind donations are basically non-cash donations where you can donate your old clothes, furniture, or other household items. These donations can be eligible for a tax deduction, which would be calculated based on the fair market value of the products.
If you’re planning on making in-kind donations, here’re a few important things you should know:
- The organization where you donate your items should be granted tax-exempt status by the IRS
- The donated items and clothes should be in good condition, as you cannot claim a deduction for poor or damaged items
- Make sure you are donating items that are eligible to be claimed for deduction
- Get proper proof of your donation, including a receipt or acknowledgment letter from the charitable organization
7. Donate Your Time
Donating your time and skills in volunteering for a charitable organization can also make a huge positive impact on society. However, this kind of donation doesn’t offer any direct tax benefits for the value of your time. It only allows you to deduct the expenses that are directly and solely connected to your volunteer work; for example, you can deduct the cost of gas used to travel to charitable events.
8. Organize Your Own Charity Events
You can organize charity events in your community to amplify the power of your philanthropic efforts. It’ll allow you to bring people together and raise funds to support a common cause.
From a tax perspective, apart from the tax deductions on your donated amount, you may also be eligible to deduct certain expenses that are associated with the charity events like venue rentals and promotional materials.
9. Launch Your Own Charity
If you want to streamline your charitable efforts while maximizing your tax benefits, consider establishing your own charitable foundation. It would be a lengthy process, and you’ll need professional help, especially from a tax company, to make your foundation qualify as a tax-exempt organization.
This is a big responsibility, but it offers professional athletes complete control regarding how the donations are being allocated and utilized. It gives you the power to make decisions and prioritize the programs and causes that align with your values.
How to Utilize the Tax Benefits?
The tax laws and regulations about charitable deductions can be complex and overwhelming. It’s important that you understand all the nitty gritty details to avoid any noncompliance which would hurt your tax benefits.
If you’re just getting started, consider the following steps to effectively utilize the tax benefits associated with charitable giving:
1. Donate to a reputable/qualified charitable organization
In order to claim tax deductions from your donations, you’ll have to donate to a charitable organization that has received tax-exempt status defined by section 501(c)(3) of the IRS. Some examples of qualified charitable organizations include the American Red Cross, Girl Scouts of America, museums, religious organizations, and colleges.
These organizations are given this status as they meet the specific requirements and criteria set forth by the tax authority.
Apart from these, there are several non-profit organizations without tax-exempt status, which means donations made to such organizations won’t be eligible for a tax deduction. If you’re unsure about the tax-exempt status of an organization, you can use the IRS Exempt Organizations search tool.
2. Differentiate between deductible & non-deductible contributions
Even when donating to a qualified charitable organization, you must understand whether or not your contributions are eligible for deductions. Some tax-deductible charitable contributions include:
- Cash, donated via any medium, including cash, check, credit card, or electronic transfers
- Personal assets, such as clothing, books, furniture, or vehicles
- Stock, bonds, or mutual funds
- Real estate
- Non-cash contributions, including food
- Expenses incurred while volunteering for a charitable cause, like the transportation charges and the meal cost
Whereas some non-tax deductible contributions include:
- Political contributions
- Money that’s given directly to an individual
- Donations made to foreign organizations
- Value of the time you spent volunteering or tutoring
You can also talk to a tax professional or refer to Publication 526, "Charitable Contributions," to get more information about eligible and non-eligible deductions.
3. Keep the donation receipts
Your donations (cash or non-cash) would be eligible for a tax deduction only when you have the appropriate documentation to acknowledge the contribution. It may get complicated to understand what kind of records and receipts you need to maintain because the process varies depending on the nature of your donation.
But in general, if you are making a cash donation, you’ll need a proper bank record and, in some cases, a letter of acknowledgment from the charity acknowledging your donation.
Similarly, in case of non-cash deduction, you need receipts with written acknowledgment, and in case you plan to deduct more than $500 in donated items, you’ll have to fill out Form 8283.
Maintaining these records may seem like a hassle, but without these documents, the IRS can disallow your deductions for charitable contributions. Additionally, you might even face penalties for inaccuracies and lack of documentation in your tax return.
4. Subtract the personal benefits & incentives
Some charities offer a return gift as a thank-you gesture for your donation. If you receive any such personal benefits or incentives, you’ll have to subtract their fair market value from the total amount you are claiming as a charitable donation.
For example, let’s say you made a donation of $500 to a charitable organization, and they gave you a t-shirt worth $10 in return for your kind gesture. Then you’ll have to subtract the fair market value of $10 from your donation amount, which means you can claim $490 as a donation on your tax return.
5. Consult with a tax professional
It's hard enough to navigate through the tax laws, but understanding the intricacies of your deduction based on your donations adds another layer of complexity. In such cases, it’s highly recommended to consult with an experienced tax professional and understand how you can structure your donations to maximize the tax benefits.
These professionals can analyze your financial situation and suggest the best charitable opportunities, such as donor-advised funds or setting up your own charitable foundation. Also, a reputable tax company can help keep proper documentation to support the tax deductions and minimize the risk of errors and audits.
In short, consulting a tax professional will not only help you stay in compliance with the IRS guidelines and reporting obligations but also help maximize your tax savings.
How to Claim Charitable Deduction on Your Tax Return?
There are 2 ways by which you can claim your charitable deductions: itemized deductions and standard deductions. The itemized deductions method requires you to calculate and report your individual donations separately with certain forms like Form Schedule A. It’s generally a more lengthy and time-consuming process.
On the other hand, through a standard deduction method, you can claim a predetermined deduction amount set by the IRS. This requires less effort, which makes it a more preferred option.
Which one of these deductions is beneficial for you will depend on your charitable contributions and financial situation. Ultimately you’ll have to calculate and compare both deductions to identify which one is lower and more beneficial for you and then decide on how you want to claim your deduction.
Summing Up
Charitable giving enables you to give back to society and make a positive impact. The potential tax benefits only serve as an additional incentive to encourage you to continuously engage in philanthropy and charitable giving.
However, it's crucial for athletes to understand the landscape of tax regulations and ensure compliance to claim tax deductions. It includes partnering with qualified charitable organizations, understanding what qualifies for a tax deduction, and keeping all the records and documents.
If this sounds overwhelming, you should contact TXS Soar to get customized advice from our experts on how to maximize your tax benefits and manage your finances. Our team is experienced in working with professional athletes and helping them navigate through the complex world of finance and personal branding.