Charitable Giving, Simplified
Donating to charity is an excellent way to support people and causes that are important to you. But whether you plan to give once, on an ongoing basis, or as part of your estate planning, chances are you have several options about what, when, and how to give.
There’s no best strategy for any of those options. But if you want to benefit the causes you support and yourself as much as possible, some strategies are better than others.
What to Give
Nonprofit organizations vary in what they’re equipped to accept, but virtually all can gratefully receive:
- Mutual funds
- Exchange-traded funds (ETFs)
Most can also accept property and vehicles, although some may provide less of a benefit than you think.
As a general rule, most charities derive the biggest benefit from cash and donations that can be easily converted into cash, such as stocks, bonds, mutual funds and ETFs. Many larger nonprofits can also accept other valuables, such as artwork, as well as automobiles and real estate. And, of course, items that are critical to their missions, such as donating canned goods to a food bank, are generally appreciated.
Two cautions when donating a vehicle:
First, make sure that the nonprofit is a 501(c)(3), or your tax deduction will be invalid. Second, find a charity that accepts vehicle donations directly. Many work through a for-profit third party, which will sell the vehicle and keep the majority of the proceeds. After all, you want your donation to support a cause, not boost someone’s profits.
Charity and Taxes
There are several ways to give to charity during your lifetime, and some offer significant tax advantages.
As noted above, for those making smaller, one-time donations, these are tax-deductible even when not itemized on tax returns. And, there is always giving by way of time and talent, which is often the case for those who are just starting out in their careers.
For people who’ve reached the stage in life where they want to give more substantially, such as mid-career professionals, one common strategy is to establish a donor-advised fund (DAF). In this case, generally, donors can make a large donation to a DAF and receive an immediate tax deduction, then make charitable grants to an organization over time. If, say, you know you plan to donate to an organization regularly, and it makes sense to capture the tax deductions for much of that giving now, a DAF can be the right move. This may also be a time to consider donating securities that have appreciated in value, earning a tax deduction, and saving on capital gains taxes.
A DAF can also make sense for donors who are retired, as can a qualified charitable distribution. Here’s how that works.
If you’re old enough (the current requirement is 72) to have a required minimum distribution from your retirement plan, you can have the IRS donate that money directly to the nonprofit of your choice. Assuming you didn’t want or need the income, you avoid taxes and the nonprofit gets the donation.
If charitable donations are part of your estate planning, you have a number of options in terms of trusts and annuities. Those options are too numerous and complicated to be discussed here; your financial planner, estate planning attorney, and tax professional can help you structure your donations to benefit the organization, your estate, and your heirs.
How to Give
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law in March, changed some of the rules for charitable giving. Here are some of the highlights:
Taxpayers who take the standard deduction and don’t itemize can deduct up to $300 ($600 for married couples filing jointly). This is an “above the line” adjustment to income that will reduce taxable income. A donation to a DAF does not qualify for this new deduction.
Individuals who itemize can now deduct much more, up to 100% of their adjusted gross income. The former limit was 60%. However, this increased deduction is only for public charities; donations to private foundations are still bound by the old limits.
Most importantly, document everything in writing. Keep receipts and agreements. Make sure your records are updated, especially in your estate planning documents. Be prepared to respond to any inquiries the IRS or your state taxing authorities may have about your donations.
And, as mentioned previously, discuss your donations with your financial planner, tax professional and, if necessary, your estate planning attorney to maximize the benefits of your charity to the organizations and yourself.
If you’d like to learn more about charitable giving, check out the recording of our Lunch & Learn on the topic.