Giving Tuesday 2018 was a record breaker. Donors made 3.6 million donations, totaling more than $380 million in the U.S. alone. That is up from $274 million raised on Giving Tuesday in 2017. Keep in mind that we’re referring to JUST ONE DAY—Giving Tuesday, which takes place the Tuesday after Thanksgiving.
Most of us have a cause that is near and dear to our hearts—medical research to eradicate a disease; food, shelter and care for the homeless, children or animals; natural disaster relief and religion organizations to name just a few. It is a wonderful feeling to financially support a charitable organization that you believe in or a cause to which you are emotionally attached.
While the amount given to charitable organizations has increased (and trends predict continued growth), recent tax law changes are changing how people give.
Regardless of your charitable passion and chosen cause, there is a common question that our clients ask when it comes to charitable giving:
What is the most efficient way to give money to support a cause and what kind of tax benefits can I get for giving money to the organization of my choice?
The answer is not exactly simple, but there are a few tools that can make the process of giving easier, more efficient, and easier to understand.
The best way to start is to grasp a few key charitable tools you can use:
Donor Advised Fund (DAF)
A donor advised fund is established at a public charity and allows a donor to make a charitable contribution to his or her fund. The donor receives an immediate tax deduction, and then donates money from the fund to any charity or charities at the time of his or her choosing.
For example, you donate $20,000 to your DAF in 2019, 2020, and 2021. You get to take the $20,000 deduction in each of those three years. You decide to let your fund grow with interest for five years, so in 2026 the fund is worth $80,000. You choose any number of charities that you want to support and give each of those charities a share of the $80,000.
Designated Charitable Fund
A designated charitable fund works similarly to a donor advised fund, but the difference is that it is specific to one charity instead of having the option to donate to any charity of your choice. The benefit of setting up a designated charitable fund is that you can donate to the fund and take the deduction in any year, and then you can actually give the money to that charity sometime in the future. Direct charitable funds qualify for the QCD (Qualified Charitable Distribution), but donor advised funds do not.
Qualified Charitable Distributions (QCDs)
Qualified charitable distributions are an extremely valuable tool for individuals who want to give money to charity, are over 70.5 years old and are required to take distributions out of their IRA(s) required minimum distributions (RMDs).
A QCD allows an individual to take their RMD and send it directly to a charity or direct charitable fund. Doing so satisfies the RMD (which is usually a taxable distribution) and avoids paying taxes on the distribution by sending it directly to the charity or charitable fund. This helps a donor lower taxable income, which may impact certain tax credits and deductions, including social security.
In addition, QCDs don’t require that you itemize, which due to the recent tax law changes, means you may decide to take advantage of the higher standard deduction, but still us a QCD for charitable giving as part of your retirement plan.
Taking Full Advantage of the Tax Code is Good for Charities and You
These are just a few of the many tools that are available for individuals to take full advantage of the tax code, while supporting the causes that are near and dear to their hearts. If you have questions about how and where to start, begin with your CFP® professional or wealth advisor. Most financial advisors are familiar with local organizations and can assist donors with setting up charitable funds. Many communities and cities have a local community foundation that will help set up and manage charitable funds and distributions.
Giving to the charities that you care about can be very gratifying. If you are going to financially support a cause, it is in your best interest as a smart investor to make sure that you reap the tax benefits of doing so. And the team at Metcalf Partners Wealth Management can help ensure your charitable gifts are a win-win.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. We suggest that you speak with a tax professional about your individual situation before taking any actions.