As the calendar turns to the fourth quarter, and in light of the recent floods around our region, we thought we would bring some attention to charitable giving. We love working with clients who are charitably inclined! I believe most folks who give are doing so solely to support an organization or cause for which they are passionate, while the financial benefit they might receive is only an added bonus. However, if you understand some of the financial “fine print” involved with charitable giving, the right moves could potentially bring a benefit to both you and your chosen charity. Giving wisely might afford you more resources to support the causes and organizations that mean the most to you!
Keep in mind, this article provides general information only. Before modifying your charitable strategy, we recommend consulting your financial, tax, and/or legal professionals. Here are a few aspects to consider in your giving.
Evaluate the Impact
How can you maximize the impact of your gifts? First, consider giving to a qualified charity with 501(c)(3) nonprofit status. Also, organizations such as Charity Navigator, Charity Watch, and GiveWell have websites that offer information to help you evaluate a charity and learn about how effectively it utilizes donations. If you are considering a large donation, it is often wise to ask the charity involved how it will use your gift.
If you’re still working, you may want to check with your employer. Some companies match charitable contributions made by their employees, an often-overlooked opportunity to give back.
Itemize to Optimize
To deduct charitable donations, you must itemize them on IRS Schedule A. Thus, you’ll need to log each donation you make. Ideally, the charity will provide you with a form to document proof of your contribution. If the charity does not have such a form handy (and some do not), a receipt, a credit or debit card statement, a bank statement, or a canceled check can work. The IRS may want to know three things: the name of the charity, the gifted amount, and the date of your gift.
Remember, itemized deductions may only have tax benefits when they exceed the standard income tax deduction, so be sure to check on the standard deduction amount for your tax filing year.
Show Your Appreciation
Many charities welcome non-cash donations. In fact, donating an appreciated asset can be a tax-savvy move. You may wish to explore a gift of highly appreciated securities. Selling securities can lead to a taxable event. As an alternative, you or a financial professional can write a letter of instruction to a bank or brokerage, which can facilitate authorizing a transfer of shares to a charity.
This transfer can accomplish three things:
- You can manage paying the tax you would normally pay upon selling the shares.
- You may be able to take a current-year tax deduction for the full fair market value of the shares.
- The charity gets the full value of the shares, not their after-tax net value. This can be a winning strategy all around.
Qualified Charitable Distributions
Qualified charitable distributions, or QCDs, allow individuals age 70½ and older to make tax-free donations directly from an IRA to a qualified charity, potentially satisfying all or part of their annual Required Minimum Distributions. A QCD can further your philanthropic goals and help reduce the tax hit from your RMD. QCDs don’t count as income, meaning you can’t deduct the contribution on your tax return, but in many situations their tax benefits could outweigh those of donating cash or other assets to charity.
Donor Advised Funds
A donor-advised fund, or DAF, is like a charitable investment account for the sole purpose of supporting charitable organizations you care about. When you contribute cash, securities, or other assets to a donor-advised fund at a public charity, like Schwab Charitable, you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth, and you can recommend grants to any eligible IRS-qualified public charity. Contributing to a DAF might be useful to frontload a large portion of your giving into a single year helping offset taxes from a high-income year.
Whatever your situation, getting advice from a tax or financial professional can help you give wisely to the organizations and causes near and dear to you. We are here to help find a strategy that works for your situation.