What Advisors, Clients Should Know About Political Donations

What You Need to Know

A growing number of investors say they want to make a bigger difference in the world, according to a UBS study.
Contributions made directly to candidates are not tax deductible.
However, donors can use their money to indirectly support candidates or causes, and get a tax break while doing so.

Whether it’s supporting a favored political candidate or party, contributing to a nonprofit that’s working for a cause they care about or using an impact lens when building a portfolio, one thing has become increasingly important to investors.

A UBS study found that 51% of investors over age 50 said that the pandemic made them want to make more of a difference in the world. That number rose to 79% for investors under age 50.

Meanwhile, the ways that donors choose to give continue to expand, and the lines increasingly blur between public and private causes. The desire to give creates an opportunity for advisors to help their clients find the most efficient ways to use their capital to drive change. In an election year, that often involves conversations about political giving.

From a tax perspective, contributions made directly to political candidates are not tax deductible, but there are some ways that donors use their money to indirectly support candidates or causes — and get a tax break in the process.

So far this year, outside groups have spent nearly $2 billion on political campaigns, according to OpenSecrets.org, with much of that coming directly — or indirectly — from individual donors.

Here’s a look at several strategies clients may use to contribute to candidates and causes they care about.

Direct Political Contributions

It’s important for clients to understand that donations to political parties, politicians, or political action committees typically are not tax-deductible on a federal level. In addition, there are some important rules they should know about such donations.

Donations to Candidates, Political Parties and Traditional PACs

The federal limits on how much an individual can contribute directly to a politician or their party vary depending on the recipient and break down as follows:

• Individual candidates or candidate committees: $2,900 each • Traditional political action committees (PACs): $5,000 each • State, district and local party committees: $10,000 combined • National party committees: $36,500 • National party committee accounts: $109,500

Contribution limits are indexed to inflation, so it’s likely that these limits will go up ahead of the 2024 election season. Contributions are not tax-deductible, and are not subject to gift tax rules. There are also no deductions available for donations of in-kind services or for time that you volunteer with a campaign or political committee.

Recipients must report all donations worth more than $200 to the Federal Election Commission, and the donor’s name, address and amount donated will be posted publicly in a searchable database on the FEC website.

Clients with a small business organized as a partnership can also make contributions through their company, but corporations are not allowed to make direct political contributions unless they have created a separate segregated fund (SSF) for that purpose.

Minors are allowed to make donations to political candidates, subject to the rules above, if they’re doing so with their own money and by their own choice. Adults cannot give minors cash specifically for the purpose of making a political donation.

Donations to Super PACs

So-called Super PACs are political action committees that can advertise or conduct other activities such as phone banking or canvassing in support of (or attacking) a candidate, but Super PACs are not allowed to donate their funds to a candidate or coordinate directly with that candidate or their campaign.

There are no limits on the amount of money that individuals or corporations can give to Super PACs. Gifts are not tax deductible or subject to gift tax rules.

Super PACs also must report any donation that they receive in excess of $200, but clients who want anonymity may be able to keep their names off public registries by giving through a corporation, LLC or a 501(c)4 organization (see below). High-profile Super PACs include the Senate Leadership Fund and Women Vote!

Some PACs are “hybrid PACs,” meaning they act as both a traditional PAC and Super PAC. Also known as Carey Committees, these organizations must maintain a separate bank account where they keep the funds donated or used for their Super PAC activities.

State Tax Credits

While political donations are not deductible on federal taxes, a handful states do offer a tax break for donors to political candidates or political action committees in the state where they file taxes. State tax credits or deductions for political contributions typically stem from a desire to spur political contributions from low-income taxpayers who might not otherwise make a political contribution.

The rules for such deductions vary by state:

• Arkansas, Ohio, Minnesota: Up to $50 credit for individual filers and $100 for married couples filing jointly • Oregon: Up $50 credit for individual filers making less than $75,000 and $100 for married couples filing jointly and making less than $150,000 • Montana: Up to $100 deduction for individual filers and $200 for married couples filing jointly. (Note that since this is a deduction and not a credit, taxpayers will need to itemize to claim it.)

Most states also have rules about how much individuals can contribute to political candidates and when recipients must publicly report those contributions.

Indirect Contributions With Tax Advantages

For clients who want to advance political goals and receive some tax benefits in the process, there are more indirect ways to contribute to their cause that may have some tax advantages