A rising stock market, a strengthening economy and a change in the tax code propelled charitable giving by American individuals, bequests, foundations and corporations to just over $410 billion in 2017, according to Giving USA 2018: The Annual Report on Philanthropy for the Year 2017. It was the first time that giving exceeded $400 billion in a single year.
Some non-profits are nervous that because the new tax law nearly doubled the standard deduction, approximately 85 to 90 percent of Americans will not be entitled to deduct their contributions and therefore, donations may edge lower this year. But many give purely for altruistic concern for others, not to reduce their tax bills. Regardless of your motivation, here are three important steps to keep in mind:
Step 1: Confirm that the Charity is Legitimate. Do not provide any personal or financial information until you’ve researched the charity. Use the IRS’s Exempt Organizations Select Check Tool to confirm the organization’s federal tax status.
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: Cash/Check/Credit Card. 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.
If you do want a tax advantage from your giving, you should 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 recapturing 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.
For those who are 70 ½ and older 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 over charitable contribution makes sense as a part of your overall financial plan, make sure you tap the correct accounts and help you keep meticulous records.