By Lazaros Ioannou, APC Sports Consulting Ltd
While the main motivation for donating to charity is helping the less fortunate, giving back to the community and contributing to making the world a better place, there is also a significant tax benefit to those who give. The purpose of this blog post is to inform Money Smart Athletes about the tax benefits of charitable giving and give guidance in connection with the manner that charitable contributions may be structured for maximum tax efficiency.
Tax authorities all over the world recognize that giving to those in need and supporting a philanthropic cause is important, therefore they provide tax breaks for donations, by allowing such donations as tax deductible expenses. Charitable donations to qualified organizations can be deducted from the athlete’s income thus resulting to a lower tax burden. The extent to which donations can be deducted from the athlete’s taxable income depends on their nature, their timing, whether they are made in cash or in kind as well as other factors that may arise from local tax legislation.
To fully utilize the tax benefits associated with charitable giving there are a number of issues that athletes need to be aware of:
- The donation must be made to a qualified charitable organization
Not all organizations qualify for tax-deductible donations. Usually this information can be provided by the charity which will let athletes know whether their donation is tax deductible and in which jurisdiction. In general, tax deductions are not allowed for contributions to individuals, political parties, political campaigns, or international charities which do not have a presence in the athlete’s country of tax residence.
- The donation is deductible in the year it is actually made
The contribution is considered paid and can be thus deducted from the athletes’ taxable income when the payment is actually made.
- The donations must be supported by proper documentation
Athletes need to maintain proper documentation for their charitable contributions. Such documentation can be the relevant receipt or confirmation that usually the charity will provide or the athlete’s credit card statement showing the relevant donation payment.
Another form of philanthropy that is widely used by athletes and sports professionals is the Charitable Foundation. Creating a private foundation can provide a good strategic tool towards planning the athlete’s charitable giving. The main advantage of donating to a private foundation is that athletes are able to maintain control over the timing of the charitable contributions and the disbursements from the foundation to charities. Athletes can make donations to the foundation during the high earning years of their sports careers so that they can take advantage of the relevant tax deduction when their taxable income is at its highest. Subsequent to contributing the funds to their foundation, athletes have the flexibility to structure the disbursement of their donations to their preferred charitable causes over multiple years. In this manner, Money Smart Athletes can secure that they will be able to continue to make payments to their preferred charities even after their playing years are over, when their income might not be that high.
Other than cash donations, athletes may also donate assets to their charitable foundation. Usually, the full fair market value of appreciated long-term assets, such as stocks, bonds or mutual funds can be deducted from the athletes’ taxable income and in addition, there is no capital gains tax. Donating investments instead of cash can be a very effective and tax-efficient way to support a charity. Generally, if athletes own assets which have appreciated in value, it is best not to sell securities to generate the cash needed for a donation; contributing the securities directly to the charity maximizes the amount of the athletes’ gift as well as their deduction.
Similar to the private foundation is the Donor – Advised Fund. A Donor-Advised Fund, or DAF, is a giving vehicle established within a public charity. It allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time. Donors can contribute to the fund as frequently as they like, and they may recommend grants to their favorite charities, whenever they feel it is appropriate to do so.
It is advisable, before athletes start making payments to charities, to create a comprehensive giving strategy which will maximize their giving as well as optimize their relevant tax benefit. In creating such a strategy, athletes need to decide on the preferred type and method of their philanthropic endeavors i.e. Private Foundation, Public Charity, Donor-advised fund, etc, whether they will donate cash or any other types of assets, and the timing of such donations for maximum impact.
For more information and guidance on planning and creating a successful philanthropic strategy for maximum tax efficiency, you may contact us at [email protected].
