There’s Still Time for Charitable Giving

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There’s Still Time for Charitable GivingCharities are hit especially hard during tough economic times. They face reduced giving and often greater needs. They must find supporters who will donate more to offset those who will give less.

Charity freely offered is a virtue distinctly more valuable than any government program funded by taxes, which are an obligation and a duty. With no resources of its own, the government can only take the production of others and redistribute it. Political support for government entitlement programs is like being generous with your neighbor’s credit card. Those who seek to be charitable must first produce more than they consume to have something to share. Only when you give of your own resources is it truly charity.

Americans are a generous people. But we don’t like to pay taxes. Instead of giving cash, there are two ways you may be able to give so more of your money goes to charity instead of the IRS.

First, giving appreciated stock allows you to donate more generously. By contributing appreciated stock directly to charity, you can avoid the 15% (or 20%, depending on your tax bracket) capital gains tax. If you sell $1,000 worth of appreciated stock and are in the 15% capital gains tax bracket, you will have to pay a 15% tax on the gains. If most of the stock’s value is appreciation, the tax you owe will approach $150, leaving only $850 for charitable giving.

But if you transfer the stock directly to charity, you can take the full $1,000 tax deduction, and the organization will not have to pay any taxes when it sells the stock. By giving stock, you can save on capital gains taxes and can make a bigger gift.

Second, if you are age 70 1/2 or older, there is another powerful way to give. This year you are allowed to make tax-free qualified charitable distributions (QCDs) directly from your IRA account.

Normally you would be obliged to take the distribution, increase your Adjusted Gross Income (AGI), and then give to charity as a charitable deduction. The difference may not be obvious, but it’s there. Many calculations in the tax code are tied to your AGI. Increase your AGI and you risk phaseouts of various deductions, increased Medicare premiums, and other taxes. Take $100,000 from your IRA, pay income taxes, and give it to charity, and the tax code still punishes you despite your generosity.

The QCD provision allows you to gift directly from your IRA. Although you won’t get a deduction, it doesn’t matter because it won’t add into your AGI in the first place. Each account owner may give up to $100,000 in 2016 without having to pay income tax on the distribution. Gifts from IRAs are also an excellent estate-planning tool, if you are interested in making a large gift to reduce the size of your estate. The details are complex, so contact your tax professional or financial planner to make sure you are complying with the IRS rules.

If fear and worry about your own investments are eclipsing your charitable nature, there’s help. Find out the state of your own finances so you are confident you can afford to be a donor rather than a recipient of charity.

If you want to know if your gifts to charity are being used as well as they could be, you are not alone. Four of five Americans worry that the charities they support are not stewarding donations well. Fortunately, checking up on them is simple.

Because charities don’t pay taxes, tax form 990 serves only as an informational return. But for the curious donor, it provides a benchmark to compare the relative health of charities. On the form, you’ll find data about how much of your donated dollars go to overhead versus program services. The form also includes facts on revenue streams, general expenses, wages paid to key employees, plus a list of board members.

When examining a charity’s spending, experts suggest that 65 cents (or more) of every dollar should be spent on program activities. However, due to the type of service the charity performs, more or less may be allocated to program services. For example, an art museum typically has higher operating costs because of its specialized facilities and security requirements and may allocate as little as 50% of the overall budget to program services. A food bank, in contrast, might be able to devote more than 90% of gifts to feeding the hungry. The key here is to compare similar charities to each other.

Although charities are required to send you a copy of their form 990 upon request, the fastest way to locate a free copy is to go online. GuideStar.org and FoundationCenter.org both provide free access to 990s as well as search tools to find other charities in your state or city. A host of online tools can give you additional insights about the nonprofit in question. CharityNavigator.org lists ratings for charities based on their financial health. And the Better Business Bureau Wise Giving Alliance measures public charities against its 20 standards for charity accountability. Their analysis of nearly 1,600 national charities can be found at give.org.

When you give to charity, you make an investment. By doing a little homework, you can be sure your gift gives you the best possible return on your investment. And although giving certainly is its own reward, giving wisely increases the blessing.

Photo used under Creative Commons Zero license. The original version of this article was published December 21, 2009.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)