Financial Advisor in Raleigh NC: Charitable Giving
You may be bracing for that early December feeling — a crisp chill in the air, the jingling of bells, and a mailbox overfilled with donation requests from charitable organizations.
The nonprofit organizations that we give donations in order to support our favorite causes are dependent on those charitable contributions. And while the contributions we make are for the greater good, many savvy investors understand that charitable contributions can also be an investment.
When we donate to a nonprofit organization, we are not only supporting a cause we care about, we are also investing in that organization. Our donations help to ensure that the organization can continue its work, and as such, we can see a return on our investment in the form of the good that the organization does in the world.
Why Donate?
Reasons for donating are as varied as the contributors themselves. Besides furthering the goals of a cause close to one’s heart, charitable giving can soften one’s personal brand, be a touching tribute or legacy for a loved one or create numerous tax advantages for investors.
A charitable tax write-off sows guaranteed returns, and a lifetime of charitable giving can help with estate planning. There are several ways that a charitable contribution is an investment in a portfolio. For example, opening a charitable remainder trust (CRT) may help an investor turn non-income-generating assets and properties into being profitable.
Charitable investments may also fund life insurance, a way to better provide for heirs. Additionally, private foundations offer reduced estate and income taxes; a charitable bequest may reduce gift taxes, and donor-advised funds allow assets to grow tax-free.
Charitable Deductions
Charitable donations allow you to give and take—you give money or property to a qualified charity and then take an income tax deduction. By supporting an organization or cause, you may be able to lower your tax bill.
Donations of cash or property to qualified charities are, for the most part, deductible on your personal tax return. If you receive something in return for your donation, you must reduce your deduction by the value of that item or service.
For example, if you donate $125 to a charity and receive a book worth $35, your total deduction would be limited to $90. The charity must inform you of the item’s value. Charities must also give you documentation for every contribution over $250.
Although you cannot deduct the value of your time or services given to a charity, you may deduct out-of-pocket expenses, including a per-mile deduction for charity-related driving. To deduct property donations worth over $500, you must provide additional information with your federal tax return. Be sure to get a professional appraisal for donations worth over $5,000 (other than publicly-traded securities) and non-public stock worth over $10,000.
Even if you donate every penny of what you make in any given year, your charitable contribution deduction is limited to 50% of your adjusted gross income (AGI). However, you can carry forward the excess contributions five years. Gifts to private foundations and gifts of appreciated property are subject to lower limits.
Screening Chosen Charities
It’s the season for giving, but beware. There is never a shortage of charitable foundations misusing funds or outright scams. As an investor, you want to make sure your dollar is stretched as far as possible, which means fully screening whom you choose to give donations. Luckily, now more than ever, there are more options for screening the charities of your choice.
charitynavigator.org, give.org — Document legitimate charities, including governance and cost-effectiveness. Check these websites to see if the charity you are thinking about giving is a scam.
The Charity Navigator app — Provides quick reference checks.
myphilanthropedia.org/ — Ranks the most cost-effective charities by cause.
GuideStar — Collects the tax returns of charitable organizations. Here you can see executive compensation, mission statements, and whether any money went to the family or business of the executive, among other charity personnel.
When to Donate
For tax savings, there is not necessarily a best time to give throughout the year. However, the urge to give is typically strongest around the holidays. As the holiday season coincides with year-end, this time of year is often best for investors looking to limit their tax burden.
It is important that you have a charitable-giving plan. Researching the charities that serve the causes close to your heart and working with your financial advisor to develop a plan around your giving will help you maximize the benefit of your donation, both for the organization of choice and for your personal investment.
Documenting Your Charitable Gifts
As you plan your giving, it is important to keep accurate records in the event that you have to substantiate your gifts. Receipts for your charitable donations can confirm your contributions should the Internal Revenue Service (IRS) require proof of documentation.
If you make a charitable donation of cash or property, you need to obtain a bank record or written acknowledgment from the recipient that specifies the amount and date of the contribution, as well as the name of the charity. For IRS purposes, a canceled check for a donation of cash no longer suffices as a receipt. For property, the acknowledgment must describe the gift and provide an estimated valuation. Donations of clothing and household items must be in “good condition” in order to qualify for a tax deduction.
Remember, non-cash contributions exceeding $5,000 require a qualified, written appraisal within 60 days of the date of the gift, and you must submit the appraisal when filing your taxes. Honoring contributors with a gift of appreciation is a common practice, especially with online and television fundraising. If any considerations (e.g., meals, clothing, concert tickets, trips, or books) were given in exchange for a contribution, the donation statement from the recipient charity must specify the value of the consideration. Your tax deduction is reduced based on that amount.
While receipts and other acknowledgments are not filed with your annual Federal income tax return (Form 1040), be sure to carefully store this material along with other tax documents for the year in which the donations were made. As a general rule, keep tax records, including all tax forms, investment statements, bank statements, proof of deductions, or any receipts associated with a particular return, for at least six years. Preparation and organization can help ensure that you have the records you need when you need them.
If you have questions about your charitable giving, talk to your financial advisor or financial planner. They are your best resource as you consider how to give in a way that aligns with your goals.
Sources:
https://www.charitynavigator.org/
https://www.irs.gov/charities-non-profits/charitable-organizations/donor-advised-funds
https://www.fidelitycharitable.org/
https://www.nptrust.org/philanthropic-resources/charitable-giving-statistics/
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