Did you know that Americans donated an estimated $449.64 billion to charities and other nonprofits in 2019? According to the findings from Giving USA, this was one of the greatest years ever recorded in terms of charitable donations (since its first report was published over 60 years ago).
Americans give to charity for two main reasons: to support a cause or organization that they care about or to leave a legacy through their support.
When giving to charitable organizations, some people elect to support through cash donations. Others, however, understand that supporting an organization may generate tax benefits. They may opt to follow techniques that can maximize both the gift and the potential tax benefit. Here’s a quick review of a few charitable choices:
Direct gifts are just that: contributions made directly to charitable organizations. Direct gifts may be deductible from income taxes, depending on your individual situation.
Charitable gift annuities are not related to annuities offered by insurance companies. Under this arrangement, the donor gives money, securities, or real estate, and in return, the charitable organization agrees to pay the donor a fixed income. Upon the death of the donor, the assets pass to the charitable organization. Charitable gift annuities enable donors to receive consistent income, and potentially, manage their taxes.
Pooled-income funds pool contributions from various donors into a fund, which is invested by the charitable organization. Income from the fund is distributed to the donors, according to their share of the fund. Pooled-income funds can enable donors to receive income, manage their tax burden, and make a future gift to charity.
Gifts in trust enable donors to contribute to a charity and leave assets to beneficiaries. Generally, these irrevocable trusts take one of two forms. With a charitable remainder trust, the donor can receive lifetime income from the assets in the trust, which is then passed to the charity when the donor dies; in the case of a charitable lead trust, the charity receives the income from the assets in the trust, which passes to the donor’s beneficiaries when the donor dies.
Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with these rules and regulations.
Donor-advised funds are funds administered by a charity that a donor can make irrevocable contributions to. This gift may have tax considerations, which is another benefit. The donor also can recommend that the fund make distributions to qualified charitable organizations.
Keep the Calendar in Mind
For tax purposes, donations made by check can usually be deducted if they are postmarked by December 31; however, if you are making a large donation, check with a tax advisor since industry practices often dictate that checks must be received by the charity and cashed before the end of the year. The IRS requires donations in excess of $250 to be documented more extensively, and you must provide the name of the organization, donation amount, and whether you received any goods or services from the charity in exchange for the donation.
Avoid Giving Cash
In order to deduct charitable gifts on your taxes, all donations must be substantiated by a receipt, cancelled check, or written acknowledgement by the charity. If you frequently give cash to organizations that solicit in front of supermarkets, malls, or local stores, you may be losing out on a major deduction. Consider supporting these organizations by writing a single check or asking for a receipt for each cash donation.
Here are a few best practices for charitable giving:
- Clarify your beliefs and donation objectives
- Research organizations carefully to ensure legitimacy and tax status
- Make sure their mission aligns with your values
- Give proactively (not necessarily in response to appeals)
- Avoid the middleman and make donations directly to the organization or foundation of your choice
- Trust your instincts
- Don’t give cash and always document your donations
- Consider developing a long-term relationship with charities that are a good fit for your values
Some people are comfortable with their current gifting strategies. Others may want a more advanced strategy, however, which can maximize their gift and generate potential tax benefits. Do you need help determining which approach may work best for you?
Giving USA Foundation, 2020
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.
The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.
Published for the blog on July 28, 2020 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.