As we near the end of the year, we see many reminders that this is the season to be thankful, think about others, and celebrate kindness and love. Many of us may choose to give to charities that we believe do valuable work. According to the Giving USA 2021 Annual Report, Americans gave $471.44 billion in 2020, which was a 5% increase from 2019. Of those donations, the majority went to religion (28%), education (15%) and human services (14%).
With so many people looking at year-end tax planning and potentially making or increasing their charitable gifts in the 4th quarter, how do you navigate this Season of Giving?
Step One: Decide How Much You Want to Give Based on the Following Questions:
Step Two: Decide Which Charity(s) You Will Benefit
If you already know the names of the charity or charities that you would like to give to, we encourage you to do some research to understand how that organization uses your gift. Double check that each charity you are considering giving to is an actual qualified charity (commonly referred to as a 501(c)3 charity because of the section of code it falls under). How many times have you been solicited to make a gift only to find out at the last moment, or in the fine print, that this charity and your donation do not qualify for a tax deduction? That is not to say that an organization must fall into this category to do worthwhile work. You simply need to know how your donation will be treated for tax purposes as part of your charitable planning.
Where to Search
My personal favorite place to start is with the website www.charitynavigator.org. You can search for a specific charity by name or find charities that are related to a key word (for example). If a charity has been reviewed, it is given a star rating based on its financial health, accountability, and transparency - all based on the review of the organization’s form 990 filed with the IRS. Charity Navigator collects and displays a lot of other useful information about the charity that is presented in a more user-friendly format than the organization’s tax return (Form 990).
Identifying Mission Vision and Values that Match Yours
If available, reviewing the organization’s website and annual report are another good step to take, in order to answer the following questions:
Another great way to learn more about a charity is to become personally involved. Board involvement isn’t the only way to understand how an organization works. Spending a few hours volunteering can tell you a lot about the organization.
We usually find that the larger the gift, the more time people are willing to spend investigating a charitable organization. Do what makes you feel comfortable and confident about your donation. Your questions should be welcomed by the organization.
Step Three: Decide How and When You Will Give
Once you have identified how much you’d like to give and which charity or charities you would like to give, the next step is to decide how to give. Should you donate goods, cash, appreciated securities, art, or your time?
What to Donate
I don’t believe I have found a charitable organization that has a problem accepting cash as a donation, so this is probably the easiest and fastest way to give your donation. But is it the best way for you to give? That’s where the conversation starts…
Donating appreciated property allows you to get the market value of the property (in most cases) as your charitable deduction but shifts the burden of paying the tax on the gain of the property to the charity. Since the charity doesn’t pay income taxes, there is not tax on the gain when they sell the property you give them. If you want to give goods, securities, or other types of property, make sure the organization is set up to receive these kinds of donations. Contact the charity to see what the process and requirements are for making gifts of this kind. And start early- the paperwork and time to transfer may be more than what you anticipate. If you are thinking of donating a painting for example, depending on the value of that item, you may need to have additional documentation and possibly even an appraisal for the tax deduction documentation. Be sure to review Publication 526 (Charitable Contributions), Publication 561 (Determining the Value of Donated Property) and to check with your tax advisor for any requirements when giving any kind of property.
Qualified Charitable Distribution
Another way to give is a Qualified Charitable Distribution (QCD) from your IRA. If you have reached the age of required minimum distributions (age 70 ½), you can donate directly from your traditional IRA to a qualified charity up to a limit of $100,000. Although you will not get the charitable deduction on your income tax return, you will not have to recognize any of the distribution amount as income. This could be helpful if you do not need your required minimum distribution (RMD) but would like to make a charitable gift. By sending your RMD directly to a charitable organization, you satisfy your RMD obligation, do not have to recognize that RMD as income, and support a charitable cause. There are specific rules and protocol that must be followed around this, so be sure to check with your financial advisor and tax advisor on how best to execute this strategy.
Donor Advised Funds
If you want to (or need to for tax reasons) give a larger gift this year, but do not yet know which charitable organization to give the gift to, you may want to consider using a Donor Advised Fund (DAF). With a DAF, you can contribute now and distribute the actual gifts to charities at a later date. There are many different institutions that offer this kind of “charitable holding funds” and many different rules that go along with this arrangement. If you fall into the category of wanting to give but are not sure who and how much to give, have the conversation with your financial advisor and your tax advisor as part of your year-end planning conversation to see if this could be an option.
I have a fellow board member who often talked about giving of your time, treasures, and talents to charitable organizations. This struck a chord with me as we so often think of charitable giving as being simply the wealth or assets we would give. How much value could you add to an organization by getting personally involved where they could benefit from your talents and time? You may not get a tax deduction for that kind of giving, but I am sure the impact could be just as meaningful. Consider giving your time and talents when you consider giving of your treasures to any organization.
A trend we are seeing is some clients wanting to give more now rather than waiting to give when they pass away. If they choose to give now, they can see the impact their gift makes. Did the gift have the intended outcome? What does that mean for future giving to this organization? Most often, clients simply want to see the good and feel the joy of being able to help now. Whatever the reasoning, it is a good conversation to have relative to your year-end planning so you can make a conscious decision instead of a default decision.
As you make your way through all the year-end planning and decisions regarding your charitable contributions, we hope that whatever you decide to give - your time, your treasure, or your talents - it brings you joy and comfort. There are so many fantastic organizations doing so much good, it gives us hope for the future.