As the holidays approach, giving not only to friends and family, but also to worthy causes, might be on your mind. About 34% of all charitable giving is done during the fourth quarter of the year, which is practical for both the giving season and personal tax reasons. If you are thinking about making a significant gift to a charity this season but are not sure how to go about it, please read on.
Who to Give To
The first step in charitable giving is to find a cause you are passionate about. There are many “hot” new causes that come out and garner attention on social media, but finding a cause that means something to you will make your donation feel more significant.
You will also want to take into consideration a specific charity’s financial structure to make sure your dollars are actually reaching the “mission.” Check out GuideStar and the BBB Wise Giving Alliance for basic legitimacy, financial information and accountability standards. You can also review www.charitynavigator.org.
In case you are looking for suggestions, one of my favorites is Doctors Without Borders, which provides medical care to millions of people caught in crises worldwide, including the current Ebola epidemic in West Africa. Currently, 86.8% of the organization’s budget goes to the programs and services it delivers, with only 1.3% of the budget going to administrative expenses.
If you are a California resident looking for an even bigger tax break, the state recently started the College Access Tax Credit Fund. The fund increases award amounts for California’s Cal Grant B program, which provides money for books and living expenses to low-income college students. For 2014, you will be allowed a state tax credit of 60% of your contribution to the fund for the taxable year. (The percentage decreases slightly in the years to come, and the credit is in addition to the federal deduction of a maximum 50% of your adjusted gross income.)
Finally, for a list of the most financially efficient large U.S. charities, see this article from Forbes.
How to Give
If your donation is more than a few thousand dollars, you may want to consider one of the following vehicles as an alternative to an outright gift:
- Donor-advised fund. A donor-advised fund is run by a public charity and will allow you to make a contribution, take an immediate tax deduction (up to 50% of AGI for cash, 30% for other assets) and make recommendations for distributing the funds as you prefer on a long-term basis. (Note that the charity has control of all assets and is ultimately responsible for decision-making.) Other benefits of a donor-advised fund include elimination of capital gains tax on donated securities, acceptance of many types of assets, professional investment management and ability to keep your family involved.
- Private foundation. Forming a private foundation will allow you to donate a significant gift in any year to your own organization operated exclusively for charitable purposes. With a private foundation, you control the assets and the decision-making, deciding how to make the grants to the charities of your choice. Other benefits include an immediate tax deduction (up to 30% of AGI for cash, 20% for other assets), elimination of capital gains tax, acceptance of many asset types, full control over investment management and granting, and ability to involve family members as employees or board members. Note that setting up and maintaining a foundation is time-consuming and costly. You must distribute at least 5% of assets each year to charities, and you must file tax returns.
- Community foundation. A community foundation works like a private foundation, except it is run by many donors. They are considered public charities and will therefore allow you the 50%/30% immediate tax deduction. Other benefits include the elimination of capital gains tax, guidance in grant-making and acceptance of many asset types.
- Pooled income fund. A pooled income fund is a charitable trust established by a nonprofit organization that provides a lifetime income stream to the donor. Benefits include a potential immediate tax deduction based on life expectancy and anticipated income stream, elimination of capital gains tax on your securities gift, a (taxable) income stream for life, guidance in grant-making, and professional investment management.
- Charitable remainder trust (CRT). A CRT is an irrevocable trust established by a donor, typically funded with highly appreciated property. The donor chooses a charity (which can include foundations) as the remainder beneficiary. The donor receives an immediate (partial) tax deduction based on the present value of the remainder gift to charity. The donor also receives an income stream for life or for a period not to exceed 20 years. The main benefit is the ability to sell highly appreciated asset(s) without an immediate capital gains tax. The donor can reinvest 100% of the proceeds in a diversified portfolio, create an income stream and spread the tax liability over time. Additional benefits include reduction of the donor’s estate for estate and gift tax purposes, and the ability to defer the payment of income until retirement (or possibly when the donor will be in a lower tax bracket).
You may want to consider using a combination of these options in making your gift. As this information is just the tip of the iceberg, you should contact your financial planner as to the best strategy for you.
“About 34% of all charitable giving is done during the fourth quarter of the year.” Tweet
‘Tis the Season to Give
Regardless of what vehicle you use, it’s a good idea to donate during the holiday season. Even a few dollars to the local food bank can potentially give you a tax deduction before the year is up and, most importantly, can feed a family in need.
Disclaimer: Consult your tax advisor before taking any action on topics discussed in the blog.