Tis the season – when charitable gifting moves to the front of our minds. It’s not just that the spirit of giving is more palpable during the holiday season… At this time of year, plenty of reminders arrive in the mailbox each day; worthy causes and organizations are looking for your financial help.
If you’re like me, more opportunities to give present themselves than you may have capacity to fill. The fact is, however, that non-profit organizations are in greater need than ever, as public funding gets seemingly harder to come by, and revisions to the tax code have eliminated, for many, the instant gratification of seeing their generosity rewarded with a commensurate tax deduction. More than ever, we need to be smart about our charitable giving.
BE SMART WITH YOUR BUDGET
I can’t help but conjure the image of the flight attendant giving instructions to passengers on how to handle a cabin depressurization. In that unlikely event, apparently, oxygen masks drop down from the overhead. Fortunately, I have not been in a situation to see this happen, but I trust it does. Once they drop, you are instructed to put on your own mask before helping others. Not the other way around. The logic is clear: If you don’t follow this piece of advice, you’ll be rendered unable to help other people!
Similarly, it’s a good idea to maintain a sustainable budget before gifting money. Don’t give beyond your means, and don’t go into debt to fund charitable giving. While it may feel good now, ultimately this can hurt your ability to provide financial support in the future.
Come up with a budget of how much you can comfortably give and stick with it. Identify the gifts you’d like to make ahead of time and figure out how much should go to each cause. In my case, I like to budget a certain amount for the ‘unknown,’ so that I have leftover room in the budget to give when an unanticipated opportunity arises. If you’ve already gone through your gifting budget and find something else you’d like to support, consider putting that cause or organization at the top of next year’s list!
BE SMART WITH WHO AND HOW YOU SUPPORT
Often, people do their charitable gifting through work, using payroll deduction programs provided by organizations like the United Way. This is perfectly fine, but many folks prefer to keep slightly more control on which organizations ultimately benefit from their gifts. Clearly, you want to think ahead about what causes and services are the most important to you, and which charities you deem to be the most worthy of your support. Ultimately, gifting to organizations with which you are intimately familiar is the best way of ensuring your dollars are going to the right program or service, within the correct group. If you have a special interest in supporting a particular program that a service agency provides, for example, identify that service with your contribution. If, however, you want the organization to determine where the gifting is most needed, identify that with ‘unrestricted’ in the memo line.
One way of getting much more familiar with charitable organizations is to volunteer your time with them. This helps you to determine, first hand, how the organization spends its money, and where the need is most acute. Volunteering to help run the organization by taking a director position also helps you to understand the finances of the organization.
In cases where you may not be completely familiar with all facets of a charity, it can be helpful to dig a little further into what they do and their finances. This can help you to make sure you’re gifting to an organization that both provides worthy services AND does so in a way that is respectful of the money people contribute. You can get a look at any 501(c)(3) organization’s finances on form 990, easily accessed online by services like guidestar.org. Keep in mind that not all charities are alike. Some have higher overheads in their budget because of the type of service they provide, so it’s helpful to compare charities who provide the same basic service, to make relative comparisons on who is most efficient with gifted money.
The Tax Cuts and Jobs Act of 2017 (TCJA) had the ultimate effect of substantially reducing the percentage of people who itemize their deductions on their tax return. Overall, the percentage of people who itemize went from 31.1% to only 13.7%. This is the result of a substantial increase in the Standard Deduction, the limitation of State and Local Tax deductions (SALT) to $10,000 and the complete elimination of ‘miscellaneous itemized deductions.’
Example: John and Marie pay $10,000 per year in mortgage interest, $15,000 in state and local taxes, $3,000 in miscellaneous itemized deductions and they donate $2,000 to charities. In 2017, before TCJA, they itemized their deductions because they exceeded the $13,000 joint standard deduction (with a total of $30,000 in itemized deductions). In 2018, after TCJA, their standard deduction went up to $24,000, and their ability to deduct more than $10,000 total State and Local Taxes, along with the elimination of miscellaneous itemized deductions, brings their potential itemized deductions down to $22,000. They no longer will itemize, and whether or not they make the $2,000 charitable donation, their tax bill will be the same.
Given the example above, the unfortunate impact is that people who would otherwise give to a charity might not be as charitably inclined if they aren’t getting a tax deduction. (Importantly, I like to say that they ARE getting a deduction – they just don’t HAVE to give to charity to get the deduction!) The result has been a reduction in charitable giving in 2019 (once people filed their 2018 return and were aware of this fact).
Obviously, the hope is that you’re making contributions because you want to support the charity and not because you’re getting a deduction. (and again, you ARE getting the deduction – it’s just not predicated on your following through with a contribution!) Still, there ARE ways people can make their deductions more tax-efficient.
Example, following with the John and Marie example above, they could have taken 10 years of gifting from an existing investment account by moving $20,000 to a ‘Donor Advised Fund’. For the next 10 years, that’s where the donations will be distributed from and they would have received a $20,000 charitable deduction in 2018, making most of their charitable gifting deductible beyond the standard deduction.
For those over age 70 ½ with tax-deferred IRA assets, another strategy is Qualified Charitable Distributions. Individuals can distribute up to $100,000 per year to 501(c)(3) organizations directly from their IRA and not pay taxes on these distributions. It’s as good as being able to deduct the distribution.
Lastly, tax-smart gifting includes the ability to donate highly appreciated stock or property to charity. Selecting these types of assets is a great way to give, because you don’t have to pay the capital gains tax that would otherwise be due. The charity, upon receiving the stock or property, sells it and doesn’t have to pay taxes on it. A real ‘win-win’.
I hope you’ll be generous with your giving this year and in the future. Be thoughtful and smart and make a real impact on your community and the world!!
 Source: Tax Foundation General Equilibrium Model, April 2019.