Transferring Your Legacy
Make the most of your charitable donations
When the Tax Cuts and Jobs Act nearly doubled the standard deduction starting with the 2018 tax year, charities and tax experts expected donations to drop. Nearly one-third of taxpayers itemized deductions—including charitable giving—before the tax law overhaul, and the number of itemizers fell to 11% in 2018. Because charitable givers would no longer have the same tax-deduction incentive, the thinking went, charitable giving would suffer.
Indeed, giving by individual donors dipped 4.2% in 2018 from the previous year, according to Giving USA Foundation and the Lilly Family School of Philanthropy at Indiana University. But in 2019, donations bounced back 4.7%. And charitable giving kept rising dramatically as Americans responded to the pandemic and a variety of natural disasters. In a recent study, 27% of donors said they gave more in 2020 than the year before.
The pandemic also changed how some people give. Individual donors, corporations and family foundations gifted more money to general need funds or to a charity’s general operating fund instead of writing a check for a specific project. Some projects—such as after-school programs—were on hiatus due to local shutdowns, and donors became more concerned about addressing pressing needs, particularly food and housing.
If you tend to bunch your donations at the end of the year, take some time to vet the groups that have been the beneficiaries of your giving, and perhaps include other worthy charities. And consider strategies to make your giving into an all-year-long enterprise. You may even want to turn your charitable giving into a family affair.
Maximizing the tax benefits of your largesse is also important. You will have to itemize deductions on your tax return instead of taking the standard deduction to get a break for large contributions. But if you don’t itemize deductions, for 2021 you can still write off cash donations up to $600 if you’re married and file a joint return or $300 if you’re filing an individual or head-of-household return.
One flexible way to organize your giving is through a donor-advised fund. A DAF is an investment account used for the purpose of giving to charity. You can take a tax deduction for money you contribute to a donor-advised fund in the year you invest it. The money grows tax-free while you decide which charities you want to receive your donation.
Donor-advised funds are available through financial-services firms, independent groups, community foundations, and “single-issue charities.” As with any type of investing account, pay attention to the administration and investment fees charged by the firm.
“You really want a donor-advised fund with a low-fee structure so more of your dollars can work harder—and more efficiently—for the charities you plan to support over time,” says Scott Ward, a certified financial planner and director of relationship management services for financial advisory firm Johnson Sterling. Low fees will also preserve more of your legacy if you want the next generation of your family to continue your charitable work.
For a charity to qualify to receive contributions from a DAF, it must have a 501(c)(3) designation from the IRS. DAFs allow you to donate a variety of assets, including mutual funds and other publicly traded securities, restricted stock, privately held business interests, and retirement accounts. On the quirkier end, DAFs may accept collectibles, personal property such as jewelry and artwork, timberland, royalties, and bitcoin. Although the range of assets you can use to seed a DAF is a boon, the ease of use, the tax organization and the benefit of taking the charitable deduction in the year the contribution is made are the features many users like most.
A DAF isn’t for everyone. “The donor-advised fund is something you would want to do if you came into a bunch of money—maybe through inheritance, maybe through the sale of a company,” says Lori Atwood, a CFP and founder of Atwood Financial Planning. An influx of cash could push you into a higher tax bracket, and a large one-time donation will help you minimize your tax bill.
Most years, you can deduct an amount up to 60% of your adjusted gross income for cash contributions and up to 30% of AGI for appreciated stock as well as the fair market value of donated assets, whether you give to the charity directly or contribute to a DAF. For the 2021 tax year, you can deduct cash contributions totaling up to 100% of your AGI that are made directly to charities—but the limit is still 60% of AGI for a donor-advised fund.
If you don’t have a large sum to invest, Atwood suggests giving by writing a check, setting up a recurring transfer from your bank account or making regular donations with a credit card. She also suggests having a number in mind in terms of total donations for the year so you can incorporate your giving into your budget.
Don’t spread your giving over too many organizations. Atwood recommends choosing three to four charities that tackle the issues that you have a passion for and make a commitment to them. If you plan on getting your family involved, make sure they understand your giving ethos and your wishes for how to carry on the charitable giving upon your death.
Retirees who are 70½ or older can donate up to $100,000 a year from their IRAs to charity. A qualified charitable distribution, or QCD, can count toward your required minimum distribution, which you must start taking at age 72. You can’t make a QCD to a donor-advised fund or private foundation, so make sure the charity is eligible before you transfer the funds. A QCD isn’t deductible, but it will reduce your adjusted gross income, which can lower your taxes on items tied to your AGI, including Social Security benefits and Medicare premiums.
However you decide to give, remember to keep all receipts so you don’t have to scramble to find documentation at tax time.
Once you have figured out your giving strategy, make sure you donate where your dollars do the most good. Many people start with organizations they have a personal connection to, such as a church or religious organization, your alma mater, or a local hospital.
Be sure that the charity is making as big an impact as you think. Read the charity’s mission statement and goals to see whether they line up with your personal values. That information should be available on the charity’s website or shared with you if you contact the charity’s development office. From there, you need to make sure that the organization is a good steward of its capital. Ward suggests asking for an annual report if you can’t find one on the website. The report should have a list of current board members, the number of donations or grants made, the types of donors the charity gets, and how much of the money taken in is used for administration fees.
Websites that review charities or serve as watchdogs can help you vet a charity. Charity Navigator, for example, rates charities based on financial health, accountability and transparency. The group also provides information on CEO pay and issues advisories on a charity’s conduct when needed to acknowledge any questionable practices or bad publicity—a failure to report fund-raising costs, for example, or even more serious issues, such as allegations of embezzlement or fraud by a charity’s officers.
If you are passionate about donating to a certain organization but it gets a low rating from one review website, see what the other review sites say before you dismiss it.
If your portfolio has gone gangbusters thanks to recent market gains, it may be better to donate appreciated stock and mutual funds directly to a charity or to a donor-advised fund.
If you’re thinking about funding a DAF with appreciated stock or giving it directly to charity, sit down with a tax professional to help you see what that looks like, says Atwood.
“I’ve got clients, for example, working for big tech companies who are young and becoming vested in the company stock they own on a quarterly or semiannual or even yearly basis. Donating the appreciated stock avoids the step of turning the stock into cash, which can trigger capital gains,” she says.
The capital gains tax is usually 15% to 20% if you’ve owned the stock more than a year, so donating appreciated stock cuts you a break even if you don’t itemize on your tax return. If you do itemize, you get to avoid the capital gains tax as well as take the charitable tax deduction.
On the flip side, if some of your stocks have lost value, it may be better to sell them and then give the proceeds directly to charity or a donor-advised fund. You’ll still be able to deduct your charitable donation if you itemize, but you’ll also be able to take a capital loss when you sell the investment.
If you have received a cash windfall and want to donate a portion of it, parking the cash in a donor-advised fund is a safe bet. If you don’t have a charity in mind right away, you can let the money grow while taking the tax deduction immediately.
The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.