Charitable Giving: 7 Steps to Take

It’s that time of year, when we start to give thanks in our words, deeds and actions. While total charitable giving increased last year, when adjusted for inflation, it slipped by 1.7 percent to an estimated $427.71 billion, according to Giving USA 2019: The Annual Report on Philanthropy for the Year 2018. For individuals, the decline was 3.4 percent, adjusted for inflation. (The reason for the drop off is likely confusion and complexity surrounding the first year of the new tax code)

Most Americans expect to do about 40 percent of their charitable giving during the months of November and December, with religious organizations, health organizations, disaster relief and animal welfare topping the list of top causes. To help avoid confusion and maximize your giving, follow these 7 steps:

Step 1: Confirm the Charity is Legitimate: Do not provide any personal or financial information until you’ve researched the charity. Earlier this year, the IRS warned against a big uptick in charitable frauds. “Scam artists commonly use charities as a cover to lure honest people into providing money and sensitive personal information,” said IRS Commissioner Chuck Rettig. “Protect yourself, and make sure you are dealing with a reputable group before making a donation.” Access the IRS’s Exempt Organizations Select Check Tool to confirm that the organization is a registered public 501(c)(3) organization and has legitimate IRS Employer Identification Number (EIN).

Step 2: Investigate the Charity’s Financial Health: Once you have confirmed that the group is legitimate, you can also see what others say about the organization and how much of your donation goes to supporting programs, versus overhead.  The Better Business Bureau’s (BBB) Wise Giving Alliance, Charity Watch, GuideStar, Charity Navigator and GiveWell are all helpful resources.

Step 3: Don’t Send Cash: Never send cash donations or wire money to someone claiming to be a charity. If you are planning to send a check, your payments must be postmarked by midnight December 31st, just writing “December 31” on the check does not automatically qualify you for a deduction, and pledges aren’t deductible until paid. Donations made with a credit card are deductible as of the date the account is charged, so if you are a little late in the process, you probably should stick to credit cards.

Step 4: Let the Bull Run! U.S. stock indexes are up over 20 percent this year, which makes it a great time to gift appreciated securities from a taxable investment account. Doing so allows you to write off the current market value (not just what you paid) and escape taxes on the accumulated gains. Be sure to get information about how to send the assets and be sure to confirm all receiving account numbers.

Step 5: Use the Tax Code: If you want a tax advantage from your giving, consider “bunching” or “bundling” deductions. The theory is that if you can bunch future gifts into one year, you may be able to itemize. By doing so, you may be able to feel good while also capturing the tax benefit. One easy way to accomplish this is by establishing a donor advised fund (DAF), which allows you to make multiple years worth of donations up front. An added bonus of DAFs is that you can contribute appreciated securities from a taxable investment account, as well as cash into the account. This allows you to write off the current market value (not just what you paid) and escape taxes on the accumulated gains.

Step 6 Divert RMDs: For those who are 70 ½ and older and need to withdraw money from an Individual Retirement Account (IRA), consider a Qualified Charitable Distribution (QCD), which allows you to direct some or all of your Required Minimum Distribution (RMD) to a public charity (not to a private foundation, nor to a charitable supporting organization or a donor-advised fund).

You don’t get to count a QCD towards an itemized charitable deduction, but you avoid being taxed on the money. As a result, using a QCD may be a smart way to give, because it can minimize your Adjusted Gross Income (AGI) and a number of benefits, like Medicare premiums and taxation of Social Security, key off AGI. You can transfer up to $100,000 a year from your IRA and you can give away more money than your actual RMD amount. A QCD can be tricky, which is why working with a CPA or CFP® can be crucial. These professionals will determine if your charitable contribution makes sense as part of your overall financial plan, as well as helping you keep meticulous records and making sure you tap the correct accounts.

Step 7: Keep Good Records. For any cash or property valued at $250 or more, you must have a receipt (bank record, payroll deduction or written communication) identifying the organization, the date and amount of the contribution and a description of the property. For text message donations, flag the telephone bill with the name of the receiving organization, the date of the contribution, and the amount given.