Charitable Giving Tips & Tricks
by ACTEC Fellows Elizabeth A. Garlovsky and Neil T. Kawashima
Charitable giving holds significant importance, as it represents a crucial opportunity for individuals to make a positive impact on their communities and causes close to their hearts. Especially as the calendar year concludes, people often engage in philanthropy to maximize tax benefits, taking advantage of deductions for charitable contributions.
Relevant videos from the ACTEC Estate Planning Essentials Library and Planning for a Diverse and Equitable Future
Estate Planning in the 2020 Election Year ACTEC Fellows Ronald D. Aucutt and Stacy E. Singer discuss how the 2020 election might affect estate planning, taxes and charitable giving. Learn what steps taxpayers may want to consider and how to plan for future legislation, changes in the estate gift tax exemption and charitable giving.
Giving from the Heart: Driving Diversity, Equity and Inclusion through Philanthropy Guests from the American Heart Association, Carl Wayne and Nicolla Ross, are joined by Lorraine del Prado of del Prado Philanthropy, to dicuss how professionals can use an equity and diversity lens when working with clients, the philanthropic attributes clients might look for in nonprofits, and recommendations to combat inequality in this video.
Hello, this is Elizabeth Garlovsky, ACTEC Fellow from Chicago. We are here today to talk about charitable giving. Many of us have charitable giving on our minds throughout the year but don’t know the best way to maximize our donations. ACTEC Fellow Neil Kawashima joins us today to discuss some strategies for charitable giving that anyone can use. Welcome, Neil, and thank you for joining us. Let’s get started.
Neil Kawashima: Thanks, Lizzie. Happy to be here.
Elizabeth Garlovsky: First, Neil, what are some basic rules I might want to consider regarding how much my contributions are really worth come tax time?
Neil Kawashima: That’s a great question. A donor should think about the amount of her income that she expects for that year, the year of the contribution, and also her tax rate. So, for example, she might be in the 35% tax bracket. Well, if she takes that into account—both into account—she could figure out, based on the deduction amount she wants to contribute, what the deduction will be and what the value of that deduction will be.
There are some complicated rules that limit the amount that a person can contribute to charity, or at least the amount that’s deductible. That’s based on your income for the year. So, if you were to give up to 60% of your income in cash to charity, you hit the limit. Most people do not fall into that category because most are not in a position or cannot or do not want to give a high percentage of their total income to charity. But for those who do, they ought to consult their tax preparer or tax advisor to make sure that they can fully deduct in a particular year the amount of the contribution.
Donating Stock vs. Cash Gift
Elizabeth Garlovsky: Great. Next, Neil, are some assets better to donate than others? For example, should I look at donating stock vs. cash?
Neil Kawashima: Yes, appreciated, publicly traded stock is an excellent way to make charitable contributions. And the reason is because the donor gets to count the fair market value of the donated stock for deduction purposes but does not have to realize any capital gain.
So, for example, let’s say I bought a share of stock for $10 many years ago. And this year I want to contribute the share to my favorite charity, and it’s worth $100. For charitable deduction purposes, I will be able to claim a deduction for $100, but I will not realize $90 of capital gain. So, I’ve essentially avoided tax while getting a deduction on top of that.
The charity won’t care whether it receives publicly traded stock or cash. And the reason is because even if it receives stock that it has to sell, any gain on that stock, in this case the $90, won’t be taxable to the charitable organization. And that’s because it’s exempt from tax.
Donation Bunching Charitable Contributions
Elizabeth Garlovsky: Excellent. I’ve also heard of something called “bunching,” regarding charitable donations. Can you explain a little bit further about that, and why it might be useful?
Neil Kawashima: Bunching is when a person makes multiple years of charitable contributions in one year. And the reason she might do that is because in one year, she may want to take advantage of what’s called the “standard deduction.” That’s the charitable deduction that everyone receives who’s a taxpayer. This year, it’s $13,850 per person. And so, if you have deductions that are less than that amount, it makes sense for you to take the standard deduction.
So, in a particular year, if someone is used to giving $5,000 a year, and then their total deductions would fall, say, $10,000, it would make sense for that person to take the standard deduction, not itemize their deductions. In order to take advantage of itemized deductions, a taxpayer may decide next year, for example, to make multiple years of charitable gifts.
Those totals may amount not to $5,000, but let’s say it’s to $12,000. And total deductions for that year exceeding the $13,000 amount, let’s say they go up to $20,000. Well, for next year, our taxpayer may decide that itemizing is more useful for her from a tax standpoint and tax-saving standpoint, and so she may engage in bunching.
All it means is essentially prepaying or paying multiple years of donations in one year. The charity would be happy to receive extra contributions in advance.
Explanation of a Donor Advised Fund (DAF)
Elizabeth Garlovsky: Excellent. I’ve also heard of something called a Donor Advised Fund, or a DAF. Can you tell me a little bit more about what that is and how it works?
Neil Kawashima: Yes, DAFs are very convenient vehicles to assist in charitable giving. A DAF is essentially a charitable account. You can set them up, fund them with money, and then over time, recommend to the DAF that distributions be made to your favorite organizations.
For example, this year my accountant tells me that I could make a $50,000 contribution to charity, and that would be beneficial for deduction purposes. However, I don’t know exactly what charities I want to benefit. So instead, I’ll create a DAF. I’ll fund that DAF with $50,000. And then next year or the year following, I will recommend to the DAF that it make distributions to my favorite charitable organizations.
My advice or recommendation is not binding. The DAF can veto my recommendation. However, for the most part, as long as the charities are qualified, DAFs will typically honor the recommendations of their account holders. These are great devices, and many people are using them to facilitate their charitable giving.
Charitable Donations From an IRA
Elizabeth Garlovsky: Okay, great. And what about using retirement plans? Can I make a charitable contribution directly from an IRA?
Neil Kawashima: Yes, you can. Those are called qualified charitable distributions. And IRA holders are allowed to essentially divert up to $100,000 directly to qualified charities. Those include public charities like I discussed. They do not include DAFs, and they do not include private foundations and another special type of charity known as a supporting organization.
But you could divert up to $100,000, as long as you’re age 70-and-a-half. And what this allows you is to not take that distribution into income. It counts against your required minimum distribution, but you won’t have to pay tax on it. Instead, it goes directly to the charity. So, you receive some tax savings for this, and the charity, of course, receives a generous donation.
End-of-Year Donation for Tax Purposes
Elizabeth Garlovsky: Excellent. And finally, Neil, are there deadlines that I should be aware of, and what should I do next?
Neil Kawashima: Well, yes, the most important deadline for this year is December 31. If you want to make a charitable contribution and have it count as a deduction for this year, it has to be done by December 31. So, there’s plenty of time to do that.
Elizabeth Garlovsky: Okay, great. Well, thank you, Neil, for joining us and for sharing all this valuable information.
Neil Kawashima: Thank you very much. Happy to help.