Are You Making the Most of Your Charitable Donations?
Please note: This article may contain outdated information about RMDs and retirement accounts due to the SECURE Act 2.0, a law governing retirement savings (e.g., the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account will change from 72 to 73 beginning January 1, 2023). For more information about the SECURE Act 2.0, please read this article or speak with your financial consultant. (1222-2NLK)
When it comes to charitable giving, the increasing number of organizations asking for donations can be overwhelming. How do you decide which causes to support? Plus if you're concerned about getting a tax deduction for your contribution, the higher standard deduction that was established by the Tax Cuts and Jobs Act of 2017 can make it a little more difficult.
So how do you make the most of your charitable contributions? You have to be strategic. Whether your donations are large or small, here are some ways to give meaningfully, stay true to your budget and to yourself—and possibly get a tax break too.
Personal strategies for giving
Just because you can't give to every worthy cause, there's no reason you have to feel ungenerous. With a little strategic planning, you can choose both the best place and the best way to share your good fortune.
- Start with what's important to you—Do you have a particular passion such as the arts, the environment, education, or fighting poverty? Is there an organization that has made a difference in your life? Giving to a cause that has a personal meaning can be both effective and rewarding.
- Look to your own community—Making a financial contribution that will not only benefit a cause you believe in but also have a local impact can give your donation extra meaning. Consider a local food bank, a scholarship fund for a neighborhood school or a struggling homeless shelter in your city.
- Narrow down your list—Chances are you can't give to every charity on your list, so next think about where your donations will make the most difference and choose the top three. Consider doing a little extra research by comparing charities at an independent online rating service such as charitynavigator.org or charitywatch.org before you make your final choices.
- Apportion your money accordingly—Decide on an overall dollar amount you can afford, and then decide how to distribute it. You don't have to give the same amount to each charity nor do you have to give all the money at once. Many organizations welcome small regular contributions over time.
Getting a tax benefit for your contributions
Charitable contributions are still tax-deductible; however, you have to itemize to get the benefit. With a higher standard deduction—plus the reduction or elimination of many other itemized deductions—it can be a bit more of a challenge to get total deductions above that limit. Consequently, a lot of people will choose the standard deduction rather than claim the charitable deduction.
One possible solution is to give a larger amount every two or three years to help push you over the standard deduction rather than a smaller amount every year. This potentially would increase your deductions in the year you make your charitable contributions.
Also, to encourage giving and make it easier during the pandemic, the CARES Act provided a new "above the line" charitable contribution deduction of up to $300 if you claim the standard deduction ($600 for married individuals filing joint returns). For people who itemize deductions, it expands the limits on cash charitable contributions from 60 percent up to 100 percent of 2020 and 2021 adjusted gross income.
Two tax-smart ways to give
- A donor-advised fund (DAF) is one of the easiest, tax-advantaged means of giving to charity. It's potentially more of an initial financial commitment but the ongoing benefits to you and the charities of your choice make it worth considering. It generally takes a minimum of $5,000 to open a donor-advised fund account; however, you may qualify to get an immediate tax deduction for the entire amount, if you itemize. If you donate appreciated assets, you could not only get a tax deduction, but also potentially avoid having to pay capital gains taxes. You then use the funds to make grants to any public charity and any money not immediately distributed can be invested, potentially increasing the amount available to give. To me, if you have the means, it's a great way to make an upfront contribution that you can then strategically manage over time. Plus, you can do most of it online—and have easy access to your giving history.
- A qualified charitable distribution (QCD) from an IRA is another option for retirees who are over the age of 70.5 to give up to $100,000 a year to certain qualified charities. With a QCD, the donation is made directly from an IRA to the charitable organization, which means you don't have to include that distribution in your taxable income. Even though you don't get a tax deduction from a QCD, it can be a tax efficient way to give—since the alternative of taking that distribution in to your income first and then making a donation could result in a higher tax on your Social Security benefits and Medicare premiums. In addition, a QCD can be used towards your required minimum distribution.
Making a difference
As you may have heard me say before, I believe philanthropy should be a part of everyone's financial life. It's not how much you give but rather the act of giving itself that's important. And as I wrote in a previous column, get your family involved as well. Whether you give a lot or a little, contribute money or time, by sharing what you have today you're making a difference and investing in a better tomorrow for everyone.
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