November 27 is Giving Tuesday. Established in 2012, this global day of charity was founded to “help others through the gift of time, donations, goods, or your voice.” It comes at the time of the year when individuals and organizations reassess their giving goals for the year and make year-end donations. Fortunately for donors, there are many options for charitable giving to select from—from what assets make the most sense to how best to structure a gift—to be most beneficial to the donor and the charity. For nonprofits, it’s a chance to educate donors about these options as they lobby for that annual gift.
A Fundraising Resource
Nonprofit organizations across the country are pushing to get year-end appeals into the hands of donors before the holiday rush. Right now, many board members and executives of nonprofit organizations are personalizing notes that will hopefully inspire donors to make or increase an annual gift. There’s no question that most individuals give because they believe in a certain cause or have an affinity with an organization. But perhaps educating givers on efficient ways to donate, so that more dollars go directly to a charitable organization for the same net cost to the donor, may help drive fundraising efforts.
Giving Takes Planning
Following the passage of the Tax Cuts and Jobs Act last year, fewer taxpayers will itemize and receive traditional tax benefits through charitable deductions. It’s no longer a simple write-off as new hurdles need to be met to make itemizing beneficial. This change has brought to bear more creative ways to structure charitable gifts. Different strategies, such as bunching or using a donor-advised fund, and carefully selecting types of assets to give, are now an important part of crafting a philanthropic plan (Display). Below we review the benefits of these various structures and asset decisions.
Bunch Together or Spread Out?
A bunching strategy may be an effective approach to help donors achieve their philanthropic goals and allow them to receive a tax benefit. Here is how the strategy works:
Instead of making charitable gifts each year, a donor can aggregate two or more years’ worth of gifts into a single tax year to push their total deductions above the standard deduction. Given the deduction limits, the donor must have sufficient taxable income to fully deduct several years of charitable contributions in a single year for this strategy to work. In the year individuals bunch their charitable donations, they will itemize deductions on their tax returns; in the subsequent year or years that follow, if they do not make charitable gifts or do not have enough other deductions, they will claim the standard deduction.
Often donors who employ a bunching strategy also use a donor-advised fund (DAF), which is established at a public charity sponsoring organization. DAFs are in favor today because of their low-cost, highly flexible structure. When a donor makes a gift to a DAF, that gift is irrevocable, meaning, those assets now belong to the charitable fund. The donor receives an immediate income tax charitable deduction, and retains the flexibility to request where grants are directed and how much of the fund’s assets—as little as 0% and as high as 100%—are spent each year. Funding a DAF is especially attractive in years when income is unusually high, perhaps because of a recently sold business, receipt of an outsized bonus, or vesting of restricted stock.
Donors might worry that by bunching, their charitable gifts will also be lumped together in a given year, while in other years, they will not give at all. This does not have to be the case. A donor can bunch gifts into a single year to a DAF and benefit from the tax deduction, but continue to have the same charitable impact each year. The DAF does not have to make grants in the year it receives the assets; grants can still be made annually and in the amount the donor requests.
One of the chief drawbacks when donors assets to a DAF is you relinquish legal control of those assets. While donors have the flexibility to request where the grants are directed and how much is spent, there’s no guarantee the administrator will follow your recommendations.
Charitable IRA Rollover
Owners of IRAs who are at least 70½ years old can donate (or make a qualified charitable distribution) up to $100,000 each year directly from their IRA to a qualified public charity. A major benefit of this charitable IRA rollover is that ordinary income tax, which would otherwise be levied on the required minimum distribution (RMD) from an IRA, is avoided. This avoidance of income tax reduces the effective cost of the gift. It’s important to note that the donation does not provide a charitable income tax deduction; the tax benefit lies solely in averting ordinary income tax, which for individuals who do not need the RMD to sustain their lifestyle is often attractive, lowering taxable income is always beneficial.
Unfortunately, a charitable IRA rollover has some limitations. As we mentioned, an IRA rollover must be made to a qualified public charity, but the law does not allow donor-advised funds, supporting organizations, or private foundations as recipients.
Is Cash King?
Despite which structure is chosen, selecting the optimal asset to give is important. Why? Because not all charitable gifts offer the same tax savings. Traditionally, direct gifts of cash offer a simple way to fulfil philanthropic goals, but other, more complex, types of assets, like appreciated securities, may offer a higher tax benefit. Here’s why.
For someone in the top tax bracket, deducting the value of a cash gift to a charity reduces the federal income tax owed by the charitable income tax deduction received. By contrast, gifts of appreciated publicly traded stock receive the same charitable deduction, but can also avoid the tax on the embedded capital gain which would otherwise be realized upon the sale of the security. Thus, the effective cost of the donation is lower.
Most individuals and organizations have philanthropic missions to make a difference and support causes that they are passionate about. Giving Tuesday recognizes the importance of their altruism, compassion, and goodwill, bringing to the forefront that all acts of charity—whether it’s a gift of their assets, time or voice—matter. It also matters how the gifts are structured so that donations have the greatest impact for the charity while providing the highest benefit to the donor. A financial advisor can help determine the capacity to give and how to structure gifts. That way donors can focus on what’s important—their philanthropic pursuits; the tax benefits that arise from choosing the most optimal structure and asset are just icing on the cake.
The views expressed herein do not constitute, and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation.