Financial Planning

Make the Most of Your Charitable Donations

Take a closer look at whether you’re getting the most bang for your donated bucks.

When the Tax Cuts and Jobs Act nearly doubled the standard deduction starting with the 2018 tax year, charities and tax experts expected donations to drop. Nearly one-third of taxpayers itemized deductions—including charitable giving—before the tax law overhaul, and the number of itemizers fell to 11% in 2018. Because charitable givers would no longer have the same tax-deduction incentive, the thinking went, charitable giving would suffer.  

Indeed, giving by individual donors dipped 4.2% in 2018 from the previous year, according to Giving USA Foundation and the Lilly Family School of Philanthropy at Indiana University. But in 2019, donations bounced back 4.7%. And charitable giving kept rising dramatically as Americans responded to the pandemic and a variety of natural disasters. In a recent Fidelity Charitable study, 27% of donors said they gave more in 2020 than the year before.

The pandemic also changed how some people give. Individual donors, corporations and family foundations gifted more money to general need funds or to a charity’s general operating fund instead of writing a check for a specific project. Some projects—such as after-school programs—were on hiatus due to local shutdowns, and donors became more concerned about addressing pressing needs, particularly food and housing.

If you tend to bunch your donations at the end of the year, take some time to vet the groups that have been the beneficiaries of your giving, and perhaps include other worthy charities. And consider strategies to make your giving into an all-year-long enterprise. You may even want to turn your charitable giving into a family affair.

Maximizing the tax benefits of your largesse is also important. You will have to itemize deductions on your tax return instead of taking the standard deduction to get a break for large contributions. But if you don’t itemize deductions, for 2021 you can still write off cash donations up to $600 if you’re married and file a joint return or $300 if you’re filing an individual or head-of-household return (see Smart Moves to Make Before Year-End).

The advantages of a donor-advised fund

One flexible way to organize your giving is through a donor-advised fund. A DAF is an investment account used for the purpose of giving to charity. You can take a tax deduction for money you contribute to a donor-advised fund in the year you invest it. The money grows tax-free while you decide which charities you want to receive your donation.

Donor-advised funds are available through financial-services firms such as Fidelity, Schwab and Vanguard, independent groups such as the National Philanthropic Trust, community foundations, and “single-issue charities,” such as hospitals, universities and religious organizations.

As with any type of investing account, pay attention to the administration and investment fees charged by the firm. Fidelity Charitable, Schwab Charitable and Vanguard Charitable charge an annual admin­istration fee of 0.60% or $100, whichever is greater, on the first $500,000 (amounts greater than $500,000 have a tiered fee structure). The investment fees vary. Fidelity, for example, charges investment fees ranging from 0.015% to 1.04%, depending on the mutual fund. For Fidelity and Schwab, there is no minimum to open an account and no minimum-balance requirement to keep it open. Vanguard Charitable requires a $25,000 minimum to open a donor-advised fund.  

You can also open a donor-advised fund at a community foundation (go to www.cof.org/page/community-foundation-locator). Many community funds require a minimum contribution that ranges from $5,000 to $25,000 or more.

“You really want a donor-advised fund with a low-fee structure so more of your dollars can work harder—and more efficiently—for the charities you plan to support over time,” says Scott Ward, a certified financial planner and director of relationship management services for financial advisory firm Johnson Sterling. Low fees will also preserve more of your legacy if you want the next generation of your family to continue your char­itable work.

For a charity to qualify to receive contributions from a DAF, it must have a 501(c)(3) designation from the IRS. DAFs allow you to donate a variety of assets, including mutual funds and other publicly traded securities, restricted stock, privately held business interests, and retirement accounts. On the quirkier end, DAFs may accept collectibles, personal property such as jewelry and artwork, timberland, royalties, and bitcoin.

photo of Nic Gwynedd Benders

Gwynedd and Nic Benders contribute appreciated stock to a donor-advised fund.

Photograph by Molly Strohl

Although the range of assets you can use to seed a DAF is a boon, the ease of use, the tax organization and the benefit of taking the charitable deduction in the year the contribution is made are the features many users like most. Gwynedd and Nic Benders, of Portland, Ore., opened a DAF with Fidelity Charitable about four years ago, after Nic’s employer made a successful initial public offering. The donor-advised fund has made record-keeping a lot easier as well as making giving simpler, says Gwynedd. Before, the couple had to keep track of receipts from more than 30 organizations they donated small amounts to. Now the donor-advised fund tracks their giving for them in one place, and the couple donate larger amounts of money to fewer charities. Gwynedd also appreciates that Fidelity Char­itable has a mobile-phone app that lets her look up charities she and Nic have targeted.

The couple are now able to set aside a larger portion of their income and take a tax deduction while their income is relatively high—and funding their account with appreciated stock allows them to maximize the tax benefits. (See below for tax advantages of gifting appreciated stock.) They plan to keep a sizable balance in the fund so that in the future, when their income is lower, they will be able to continue making generous donations.

Other giving strategies

A DAF isn’t for everyone. “The donor-advised fund is something you would want to do if you came into a bunch of money—maybe through inheritance, maybe through the sale of a company,” says Lori Atwood, a CFP and founder of Atwood Financial Planning. An influx of cash could push you into a higher tax bracket, and a large one-time donation will help you minimize your tax bill. Most years, you can deduct an amount up to 60% of your adjusted gross income for cash con­tributions and up to 30% of AGI for appreciated stock as well as the fair market value of donated assets, whether you give to the charity directly or contribute to a DAF. For the 2021 tax year, you can deduct cash contributions totaling up to 100% of your AGI that are made directly to charities—but the limit is still 60% of AGI for a donor-advised fund.

If you don’t have a large sum to invest, Atwood suggests giving by writing a check, setting up a recurring transfer from your bank account or making regular donations with a credit card. She also suggests having a number in mind in terms of total donations for the year so you can incorporate your giving into your budget.

The Benders employed this strategy years before setting up their donor-advised fund. They started with a goal of 1% of pretax income, “just to get an absolute dollar amount in our head,” says Nic. “And we ratcheted that up over time as our income went up. The percentage was a way to check ourselves and say, Hey, you can do better.”

The couple also tracked the organizations they gave to, along with the amount, on a Google spreadsheet. If they came up short of their goal toward the end of the year, they would find other charities to support.

Don’t spread your giving over too many organizations. Atwood recommends choosing three to four charities that tackle the issues that you have a passion for and make a commitment to them. If you plan on getting your family involved, make sure they understand your giving ethos and your wishes for how to carry on the charitable giving upon your death.

Retirees who are 70½ or older can donate up to $100,000 a year from their IRAs to charity. A qualified charitable distribution, or QCD, can count toward your required minimum distribution, which you must start taking at age 72. (A bill pending in Congress would increase the age again, starting in January 2022; see SECURE Act 2.0: 10 Ways the Proposed Law Could Change Retirement Savings.) You can’t make a QCD to a donor-advised fund or private foundation, so make sure the charity is eligible before you transfer the funds. A QCD isn’t deductible, but it will reduce your adjusted gross income, which can lower your taxes on items tied to your AGI, including Social Security benefits and Medicare premiums.

However you decide to give, remember to keep all receipts so you don’t have to scramble to find documentation at tax time.

How to vet the charities

Once you have figured out your giving strategy, make sure you donate where your dollars do the most good. Many people start with organizations they have a personal connection to, such as a church or religious organization, your alma mater, or a local hospital.

Anita and James Vaughn, for ex­ample, donate to the Baptist Memorial Women’s Hospital neonatal intensive care unit, in Memphis. Anita retired as the CEO of the hospital in 2016, and the Vaughns’ son spent time in the hospital’s neonatal ICU. The Vaughns also donate to Anita’s nursing school at Baptist Health Sciences University, to the University of Memphis, and to the Women’s Foundation for a Greater Memphis. Anita served as a board member of the foundation, so she was familiar with all the ins and outs of the organization.

Your local newspaper may have a local giving guide that comes out around the holiday season. The Benders used a local guide as a starting point when picking organizations.

Be sure that the charity is making as big an impact as you think. Read the charity’s mission statement and goals to see whether they line up with your personal values. That information should be available on the charity’s website or shared with you if you contact the charity’s development office. From there, you need to make sure that the organization is a good steward of its capital. Ward suggests asking for an annual report if you can’t find one on the website. The report should have a list of current board members, the number of donations or grants made, the types of donors the charity gets, and how much of the money taken in is used for administration fees.

Websites that review charities or serve as watchdogs, such as Charity Navigator, the Better Business Bureau’s Wise Giving Alliance and GuideStar, can help you vet a charity. Charity Navigator, for example, rates charities based on financial health, accountability and transparency. The group also provides information on CEO pay and issues advisories on a charity’s conduct when needed to acknowledge any questionable practices or bad publicity—a failure to report fund-raising costs, for example, or even more serious issues, such as allegations of embezzlement or fraud by a charity’s officers.

If you are passionate about donating to a certain organization but it gets a low rating from one review website, see what the other review sites say before you dismiss it.

Donate cash or stock?

If your portfolio has gone gangbusters thanks to recent market gains, it may be better to donate appreciated stock and mutual funds directly to a charity or to a donor-advised fund.

If you’re thinking about funding a DAF with appreciated stock or giving it directly to charity, sit down with a tax professional to help you see what that looks like, says Lori Atwood, a certified financial planner and founder of Atwood Financial Planning.

“I’ve got clients, for example, working for big tech companies who are young and becoming vested in the company stock they own on a quarterly or semiannual or even yearly basis. Donating the appreciated stock avoids the step of turning the stock into cash, which can trigger capital gains,” she says.

The capital gains tax is usually 15% to 20% if you’ve owned the stock more than a year, so donating appreciated stock cuts you a break even if you don’t itemize on your tax return. If you do itemize, you get to avoid the capital gains tax as well as take the charitable tax deduction.

On the flip side, if some of your stocks have lost value, it may be better to sell them and then give the proceeds directly to charity or a donor-advised fund. You’ll still be able to deduct your charitable donation if you itemize, but you’ll also be able to take a capital loss when you sell the investment.

If you have received a cash windfall and want to donate a portion of it, parking the cash in a donor-advised fund is a safe bet. If you don’t have a charity in mind right away, you can let the money grow while taking the tax deduction immediately.

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