As you can tell by looking at our bios, we at Platt WM like to get involved in charitable organizations! There are a number of ways to have an impact with your giving.
Impact of Tax Cuts & Jobs Act (TCJA) on charitable giving
Previously, individuals who donated to charity were able to take tax deductions for their contributions. Donors enjoyed the emotional benefits that come with giving gifts. According to new research, it turns out that giving is more pleasurable for the human brain than receiving is! They also received a tax benefit from their giving.
The deductions for charity could only be taken for those who itemized their deductions. Which pretty much anyone with a mortgage did anyway, to capture the interest deduction.
Certain other deductions are known as “above-the-line”, because you don’t have to itemize to take them. IRA and Health Savings Account (HSA) contributions are examples of above-the-line deductions.
The TCJA increased the standard deduction significantly, so fewer people will itemize. Most taxpayers will save more money if they use the new standard deduction instead of itemizing. Unfortunately for Californians and others who live in states with higher taxes, the TCJA limited state and local tax deductions. Even those with significant mortgage interest will probably not itemize either.
This has a big impact on 501(c)3 charities, who relied on donors able to itemize their deductions and save taxes on their donations. Although we’d like to think that people donate out of pure altruism, in reality the tax deduction provided a great incentive for people to give.
Which charitable organization to give to
Many of our clients (as well as our planners) have causes that are near and dear to our hearts. Charitable giving may already be mapped out for the year.
But if not, treat your philanthropy like an investment. You can make a bigger impact if you choose a small number of recipients and divide your money and time between them. As opposed to giving randomly as people ask you for donations.
Research the organization online. It’s also a good idea to see if any of your friends and family give to them, and if they have an opinion on it. You can always visit a local organization, though in some cases you might need to call first and make an appointment. There are online websites such as Charity Navigator, GiveWell, and Impact Matters that provide scorecards on effectiveness.
To be a qualified charity, the organization has to be a 501(c)3 group that qualifies for tax exemption per the US Treasury. Generally, qualified charities will be able to furnish their tax-exempt letter that states their qualifications.
Be aware that some charitable missions require a bigger administration budget in order for the organization to do its work properly. Don’t automatically discount a charity on the basis of budget. Of course after doing your due diligence you might cross them off your list anyway.
Find out what will actually be achieved with your charity dollars. For example, you might be offered a chance to donate to a training program for offenders going through rehab. But what you want to know is how many of the offenders will find jobs with this training program, not how much the training program itself costs.
How much money does the organization have? Your charity dollar often goes farther in an organization that doesn’t have much money or is underfunded, compared to a large, well-funded charity.
Donating to a charitable organization
Some higher-income people may still find that they itemize, so they’ll still be able to take a charitable deduction. Charities still need donations and will welcome them! Many donors make an effort around Christmas and Thanksgiving to donate, but groups usually need money and help year-round.
Consider making recurring donations. Household budgeting is much easier when you’re getting a steady paycheck every couple of weeks instead of large project deposits every few months. Similarly, it’s much easier for charities to allocate resources when they have some consistent income.
Check to see if your employer matches a portion of your contribution. It’s a great way to maximize your donations.
Have a lot of friends and family who are always asking for money for their pet charities? Or constantly run into different groups in front of your local grocery store? Just because someone asks you to give doesn’t mean that you have to say yes.
It’s best to have a polite “no” ready to go in all of these situations. You might say that your charity money is already allocated, or that you’ve chosen your charities for the year. Don’t feel bad about saying no. There are plenty of qualified charities and most of them need help, but you can’t help all of them.
Volunteering with a charitable organization
Time is another valuable commodity that many nonprofits could use more of! This is a great way to get the whole family involved, especially if you have young children. They get to see the impact of their efforts, while you’re all spending time together.
Ladling out the food at Thanksgiving is fun, but many groups have more urgent needs. Frequently their need is for expertise in some aspect of business, which you can help with. Smaller charities can almost always use marketing help, for example. They might need copywriters to help with their fundraising letters. Accountants to keep an eye on the books.
Fundraising – especially now that fewer people are donating the way they used to because they no longer have the tax incentive!
Qualified Charitable Deduction (QCD)
This deduction is still alive and well. It’s not a deduction, exactly, but it can help you avoid taxes at the same time you donate to charitable organizations of your choice. And you can donate up to $100,000 each year.
Rather than taking your required minimum distribution (RMD) as income and paying tax on it, you can redirect the distribution to a qualified 501(c)3 charity of your choice.
It’s very important that the money does not come to you first. Then it still is considered income, and you’ll pay tax on it. Sending it to the charity up-front means that it’s not income to you.
This tactic works best if you’re at the age where you need to take RMDs, and you don’t need the income from your RMD to supplement your portfolio.
You may now be wondering if the new SECURE Act will change this equation. As a reminder, SECURE shifts the RMD start age to 72, for anyone who turned 70 ½ after 12/31/19.
However, although you still need to be at least age 70 ½ to make a QCD, you don’t have to wait until you turn 72 to do it. In other words, even though your RMD age is pushed back by a year and a half, your ability to do the QCD doesn’t change from age 70 ½.
If you’re a 5% business owner, you too will need to begin RMDs at age 72. Even if you’re still working for the company at that age.
In other words, don’t be discouraged by the lack of a tax deduction. There are still plenty of ways to support your favorite nonprofit.
Interested in talking to one of our planners? You can email us or call 619.255.9554.