When you make charitable gifts, you provide much-needed support to organizations that make a difference in our community. But a charitable gift is a type of investment, and—as you would with other investments—you should be strategic with how you allocate your resources. By thinking carefully about all aspects of charitable giving, you can maximize the benefits of your gifts—for the charity and for you.
Identifying the right organizations.
The first step is to identify your priorities and the causes you want to help. Are you most interested in educational or civic groups? Religious or scientific institutions? Once you have decided on a particular area of focus, you can start identifying individual charities that are active in those areas. But with so many not-for-profit organizations doing good work, it can be hard to know which are most deserving of your support.
One way to narrow your list is to talk to friends and relatives who have been involved in philanthropy. They can provide first-hand, trusted referrals to worthwhile organizations. You can also do some homework to make sure you are giving to a reputable charity. That means you will need to ask some questions: How does the group measure its effectiveness? How much of its budget goes toward delivering services vs. paying for executives’ salaries and other administrative costs? Many experts on charitable giving say that a worthwhile charity should spend at least 75% of its income on services.
Fortunately, free tools are available to help you answer these questions. You may be able to find this type of information on a charitable group’s annual report and its website. You can also go to the website of one of the agencies that evaluates charitable groups, such as Charity Navigator (www.charitynavigator.org), or GuideStar (www.guidestar.org).
Get rewarded for your generosity with tax breaks.
Once you have selected the specific charitable groups you would like to support, you will face another question: How should you make your gift? You will want to choose a gifting method that is appropriate for your goals and financial situation, and keep in mind that different methods have different tax consequences.
Most gifts made to a charity with 501(c)(3) status qualify for an income-tax deduction for the donor. But, in most cases, you must itemize your tax return (as opposed to taking the standard deduction) to take full advantage of the tax deduction. For example, if you are in the 25% tax bracket and you give $1,000 to a qualified charity, you will be able to decrease your tax liability by $250 if you itemize. Generally speaking, your maximum deduction will be limited to 60% of your adjusted gross income.
Here is a quick look at some of the ways that you can contribute to a charity and the tax rules related to these donations:
- Give cash. The most straightforward and common way to support a charity is by making a contribution via cash or check. The amount of the gift is fully deductible (subject to the limits described above) in the year of the gift.
- Donate appreciated stocks. If you have stocks that have grown significantly in value, you may want to donate them to a charitable organization. You will be allowed a charitable deduction for the full fair market value of the gift on the date of the transfer, even if your original cost was only a fraction of today’s value (subject to income limitations). When deciding which appreciated stock to contribute, be sure to think about how a potential contribution will affect your portfolio diversification. You want to make sure the contribution doesn’t cause your portfolio to become misaligned with your risk tolerance and return goals.
- Contribute from your IRA. Once you turn 72, you must begin taking withdrawals—called “required minimum distributions” (RMDs)—from your traditional IRA, if you haven’t already started withdrawing money. (Roth IRAs are not subject to RMDs during your lifetime.) RMDs from your traditional IRA are treated as taxable income. However, you can exclude up to $100,000 of RMDs per year from your taxable income if you give the money directly to charitable organizations.
- Establish a donor-advised fund. When you create a donor-advised fund (DAF), you can contribute to the fund whenever you like and recommend grants be awarded from the DAF to your chosen charities over time. You can contribute cash or non-cash assets, including stock and real estate, to the DAF, and you receive a deduction for the full fair market value of the assets in the year of the contribution. Plus, the funds in the DAF can be invested and grow tax-free.
Take a holistic approach to charitable giving.
Although contributing to charity is a very personal decision, many people choose to make it a family affair. By letting your children and grandchildren know about the organizations you support, you will be telling your heirs about the causes and values that are important to you. Doing this may instill in your children the importance of giving back to your community. Some people even give their children or grandchildren a “charitable allowance” and help them choose organizations to support.
It also may make sense to let your employer know about your charitable efforts. Some companies have programs that match employees’ charitable contributions. Also, some employers may allow you to apply for larger grants to support not-for-profit groups, especially those groups in which their employees are actively involved.
While charities are always looking for financial support, don’t forget that you have other non-financial assets that can be valuable to an organization. For example, you can donate your time to volunteer with the organization, or you can provide your work-related expertise to help a group manage its operations or chart its course. You might even want to serve on a charitable organization’s board of directors. Keep in mind, though, that gifts of time or expertise generally are not tax-deductible.
Ultimately, whether you’re donating time or money to a charitable group, you are likely to get a good return on your investment. At Leelyn Smith, we are here to help you maximize the impact of that investment through careful planning.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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