Many of us find charitable giving a meaningful way to make a positive impact. It is also an important component of financial planning. Below are various smart ways to give to charity. Before giving to any charity, we advise you to confirm a charity’s tax-exempt status at the IRS’s website.
Cash is a popular way to give to charities. While cash is most straight forward, there are other financially advantageous charitable ways to give.
Direct donations through payroll deductions are an efficient way to make tax deductible donations to charities. Certain corporations and the federal government offer the option to participate in an after-tax payroll deduction program. Some corporations offer donation matching, which increases the money given to the charity that you chose.
Appreciated securities, such as stocks, exchange traded funds (ETF) and mutual funds that are held for more than a year are great options to give to a charity. The benefit of gifting appreciated securities is that you do not pay capital gains tax on the appreciation and the full gifted amount is tax deductible. The charity will not owe any taxes on the capital gains either. It’s a win-win! The securities must be transferred directly to the charity. If you sell the securities and then gift the cash, you will owe taxes on the capital gains. This can be a great strategy for utilizing highly appreciated securities.
DONOR-ADVISED FUNDS (A.K.A. CHARITABLE GIFT FUNDS)
Donor-advised funds are a great tool for charitable gift planning. Contributions to donor-advised funds are tax deductible in the year the contribution is made. You can make strategic decisions about which organizations to give to and when. For example, you can plan ahead to make larger contributions in the year or years when you are in a higher tax bracket, resulting in less taxable income. You can also bunch multiple years’ worth of gifting into a single year so you exceed the standard tax deduction and can itemize your tax deductions for that year.
Both cash and appreciated securities can be used to fund a donor-advised fund. Donor-advised fund accounts can be invested for potential future growth or held in cash. It is important to remember that contributions to donor-advised funds are irrevocable.
CHARITABLE DONATIONS FROM TAXABLE IRAS
The IRS allows those age 70.5 or older to make qualified charitable distributions (QCD) from their traditional IRA (or non-active SEP IRA or SIMPLE IRA) to qualified charitable organizations. When the rules are followed properly, you can donate up to $100,000 from your pre-tax IRA without it counting as taxable income, but the donations must be made directly from the IRA to the organization. This creates the possibility of lower taxable distributions in the future when your required minimum distributions (RMD) begin. Since the donations from your IRA are not taxable, you cannot also deduct them as an itemized expense on your tax return.
Starting at age 72, you must start taking RMDs from your pre-tax IRAs, which are generally taxable. However, donations from your IRA can count as part of your RMD, which can lower your taxes, since you will not owe tax on the donations.
Due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, RMDs are suspended in 2020, so careful planning should done with your accountant and financial advisor to determine if gifting out of your IRA is the best option for you in 2020.
A great way to keep the clutter away is by sorting through your items periodically (for example, before or after each season) to see what household items can be donated, including clothing, bedding, toys, books, electronics, furniture, appliances and other household items.
If you want to deduct the value of the donated items, it will generally be up to you to determine the fair market value at the time of donation. This amount should be the value someone would actually purchase the item for. Both The Salvation Army and Goodwill provide guides to determine the value of your donated items.
Donating time, skills and experience is personally rewarding to many people. Charities can use your help in a variety of ways, including fundraising, joining the advisory board or assisting with specific projects and events. This is also a great opportunity to involve children.
OTHER TYPES OF DONATIONS
Airline miles: Most airlines will allow donated airline miles to be transferred to charities in support of their transportation needs.
Vehicles: Donated vehicles may be used by the charity or be sold. Donated vehicles should have the title and be in working order, although some charities may accept them as is. Rules on the tax deductibility of donated vehicles can be found in the following IRS Guide.
Land, real estate and art: These gifts and other property or valuables worth more than $5,000 will likely require an official appraisal. You should discuss these donations with your tax accountant.
CHARITABLE GIVING TAX DEDUCTIBILITY
When donating cash, you can deduct up to 60% of your adjusted gross income (AGI). Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, the AGI limit for cash contributions to qualified charitable organizations is temporarily increased to 100% for 2020. This means in 2020, it is possible to eliminate all taxable income if you are charitability inclined. Appreciated securities and property held for more than one year are generally deductible up to 30% of your AGI.
Not all donations are tax deductible. It you received anything in return for a donation (for example, a dinner at a fundraiser), the specific portion of the donation relating to what you received in return is not tax deductible. The charitable organization will be able to provide you with what specific amount of your donation is deductible or not.
Always get a donation receipt for your tax records. Photos of donated goods are also helpful if you are ever audited.
WHICH METHOD IS BEST FOR ME?
This article summarizes a few ways to donate to charities. The best method is unique to each individual and depends on your assets, tax situation and intent. Additionally, while it is admirable to donate to charities, it is important to not compromise your financial security in the process. Work with your accountant, financial advisor or contact us to strategize the best options for your specific circumstances.
We hope you are staying safe and healthy and Happy Giving!
Michael Fuhr, CFP®
Evergreen Wealth Services