Charitable giving promotes happiness, draws us closer to others, and strengthens empathy. The act of charitable giving – whether time, physical items or monetary gifts – provides lots of benefits to not only the charity, but also offers intrinsic benefits to the giver. Charities are dependent on the generosity of others to help them in their missions throughout our communities. Incorporating charitable giving into your life on a regular basis may be important to you personally. It can also offer some financial benefits, depending on how you structure your giving. Let’s discuss some of those benefits and ways to be effective in our giving.
Over the decades, the Internal Revenue Code has been updated to incentivize charitable giving. As of 2022, you can make a cash gift of up to 60% of your adjusted gross income and take a full deduction on your tax return.1
The increase in the standard deduction that happened with the 2017 Tax Cuts and Jobs Act eliminated itemizing charitable deductions for many taxpayers. However, if you are in the year you will be 70½ or older, you can give directly from an IRA to a charity.2 This is a Qualified Charitable Distribution (QCD). At age 72, when you begin taking Required Minimum Distributions (RMDs), you can offset your taxable income with a charitable distribution. Let’s use the example that your RMD is $10,000 for that year. If you decided to give a $2,000 QCD, that would count towards your $10,000 RMD. So now you are taxed on $8,000 instead of $10,000. This is called an “above the line” deduction that comes straight off your adjusted gross income. This is an effective way to give to charity if you are not itemizing. Note that the physical charitable distribution check has to be made out directly to the charity and not to you. Also, this can only be done from an IRA, and not a 401(k), 403(b), 457 or other retirement savings plan.
You can give an appreciated asset to a charity and receive additional tax benefits. A piece of real estate, a stock, an ETF or a mutual fund would be an example of an appreciated asset. Let’s say you paid $20,000 for a stock, and now it’s worth $40,000. If you were to sell it, you would have a gain (short- or long-term depending on how long you’ve held it). You would have to pay tax on that gain. If you give that stock to a charity, you get the full $40,000 deduction on your tax return and you don’t have to pay tax on the $20,000 gain, as long as it is a long-term gain (held for more than one year). However, when you give an appreciated asset, there is a limit on how much you can deduct in one year – 30% of your Adjusted Gross Income (AGI).1 If you give more than the 30% of your AGI, you can carry forward that give for up to an additional five years.
How do you choose the organizations to give to?
- Give to things that you are passionate about whether that is faith driven, community specific or something else (children, homeless, the arts, etc.).
- Look at the fiscal responsibility and impact of the charity.
- The financial health of the charity – What are the program expenses for every dollar that is given? How much goes to benefit the people that are being served by the charity? As a rule of thumb, you want that ratio to be 85% or higher.
- Transparency and accountability – How much is the charity willing to share about their financials?
- Results – What is their impact? You should be able to see the quality and depth of their results as well as their capacity to continue these results.
Charity Navigator is a great place to look at the financial information on many charities. Not all charities will have complete information listed on Charity Navigator due to the difference in whether they file with the IRS electronically or by paper. If you would like to get more information on a specific charity that isn’t listed, you can ask that charity for a copy of their IRS Form 990.
The reasons we give to a charity should not be fundamentally for the tax break. The number one benefit of charitable giving should be our desire to give to organizations and people who have needs that you are passionate about. If you are interested in incorporating charitable giving into your estate plan, give us a call at (435)773-9444. We work with our clients to ensure that their charitable giving is purposeful and effective.
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