Smart Ways To Give to Charity at Year’s End

As the year-end giving season approaches, now may be a good time to review your charitable-giving strategy.

Nearly one-third of all charitable giving for the year occurs in one month, December. If you’ve ever given to a nonprofit, odds are your mailbox is going to be filling up soon with year-end appeals. That’s because charities know this is the season for giving. In this respect, nonprofits are like retail stores. The holiday season, from Thanksgiving through year-end, is as much a make-or-break season for charities as it is for J.C. Penney or Best Buy. They need our donations.

Senior adults are the most charitable of all givers. You could argue that’s because senior adults as a group have more money than younger people, which is true, but we think it goes much deeper than that. At this point in life, our perspective has changed. We’re no longer as interested in accumulating stuff for ourselves or buying that larger house. We’re more focused on making a difference and leaving the world a better place. We know we’ve been blessed in life, and now we want to share generously to bless others.

Americans are generous givers. In 2018, we gave a record $427.71 billion to U.S. charities, according to the latest annual survey by GivingUSA. More than two-thirds of those donations (68 percent) came from individual donors, with the rest coming from foundations and corporations. The bad news is that the rate of growth in charitable giving has slowed, and individual giving actually declined 1.1 percent in 2018, according to GivingUSA, but was offset by increased giving by foundations.

What’s the Best Way to Give?

Before pulling out the checkbook or credit card to donate to your favorite charities at year’s end, consider carefully whether making cash donations (including writing checks or paying by debit and credit cards)  is really your best way to give. You may be able to help your favorite church, university, or other nonprofit more through other forms of giving, which we will detail below. You may also generate far better tax savings by using some of these alternative methods of giving.

Let’s look at some of the most appealing tax-advantaged ways to give, but with the disclaimer upfront that you are wise to consult your tax advisor prior to taking action. Our purpose is to provide useful information, but we’re not tax or legal experts, and we don’t know your specific financial circumstances.

Gifts of Appreciated Stock

As this is being written, the U.S. stock market is enjoying it’s longest bull market in history. Since the rise in stock prices began in 2009, the Standard & Poor’s 500 index is up more than 330 percent. That means a $10,000 stock investment in 2009 could be worth $43,000 or even more today. Lots of you are sitting on large profits in your stock portfolios, but that creates a dilemma for you. If you sell your stocks, you have to pay capital gains tax. In the above example, you would have a profit of $33,000 ($43,000 sales price – $10,000 cost basis), but Uncle Sam would collect $4,950 of that sum for capital gains tax, assuming a 15 percent capital gains tax bracket.

Now let’s assume you decide to give that stock to charity. If you sell it first (as shown above) and give the after-tax proceeds to charity, the receiving nonprofit will only receive $38,050 of the $43,000 sale price. A better option is to donate the stock to charity and let them sell it. When doing so, you avoid paying the capital gains tax, allowing you to give more to charity. In the above example, your charity would receive the full $43,000 value of the stock. That’s a win-win. You save $4,950 in capital gains taxes and the charity gets a larger donation. Regardless of which method you choose, you may also qualify for a charitable tax deduction based on the fair market value of the stock when you sell it, not it’s original value. On this point, especially, consult your tax adviser for details.

By the way, when we talk about appreciated stocks, this includes mutual fund shares, publicly traded real estate investment trusts (REITs), and exchange-traded funds (ETFs).

Donating appreciated stock to charity is easy, but if doing so before year end, don’t delay too long. Assuming your stock is held in a bank or brokerage account, they will have a form for you to complete or will ask you for a letter of instructions. Be sure you have the name and address of the receiving charity with you. 

If you have stock certificates, all you need to do is deliver them to the nonprofit and sign them over. If the church or charity is local, then take the stock there in person to the development, advancement or fundraising office. Homebound? Can’t drive? Call the local charity and they will come to your house. If it’s an out-of-town charity and you must mail the stock certificates, use extra care. Never mail a signed stock certificate. For security, mail the stock certificate in one envelope and then mail a signed stock power in another envelope, both with instructions. Your broker or financial advisor will have stock power forms. It’s best to use an overnight shipping service with tracking or certified mail.

Timing is critical, since gifts must be received by the charity no later than Dec. 31. There’s no reason to delay, but by all means finish executing your plan before Christmas, at least a full week prior to year’s end, adjusting for holidays when banks and brokerages will be closed.

Donating From Your IRA

For those of you who are 70 1/2 or older, one of the best ways to give to charity may be through your Individual Retirement Account, or IRA. Typically, any money withdrawn from a traditional (not ROTH) IRA is taxable, even your original investment. There’s one exception: The IRS allows you to donate up to $100,000 per year from your IRA to charity and pay no tax on the withdrawal. For a married couple who both have IRA accounts, each of them can make charitable deductions from their IRAs, up to $200,000 per couple.

Now we know what you’re thinking. A $100,000 withdrawal is huge and pretty unrealistic for most people. At that rate, it wouldn’t take long to drain dry even a sizable IRA account. Keep in mind that’s just the maximum amount allowed. You can give whatever amount you want as long as you don’t exceed that limit.

A more common approach is to donate all or some of the required minimum distribution (RMD) that the IRS forces you to start withdrawing when you reach age 70 1/2. To illustrate, let’s assume you are turning age 70 1/2 and have $500,000 (total) in IRA accounts. Based on the latest IRS table released this month, you would be required to withdraw $17,182 the first year. That sum will go up each year as you age, assuming no change in the account value. This withdrawal amount adds to your taxable income, possibly pushing you into a higher tax bracket. You can avoid this added tax expense by donating your $17,182 to charity. When doing so, you pay no tax on the withdrawal.

See our recent story about IRA Charitable Rollovers for more information.

Bunching Your Investments

In the past, many tax filers could itemize their deductions and get a tax break for their charitable donations. For most taxpayers, that is no longer true. The new tax law that went into effect beginning in 2018 included a much-higher standard deduction, meaning that most taxpayers can no longer benefit from itemizing their deductions, including gifts to charity. The standard deductions for the 2019 tax year include $12,200 for single filers and $24,400 for married filing jointly. For those 65 and over, the standard deductions are even higher, $13,850 for single filers and $27,000 for a married couple who are both 65 or over.

To illustrate how this change in the standard deduction impacts the ability to benefit from charitable deductions, let’s take the case of a 66-year-old married couple who have itemized deductions of $12,000 for 2019, not counting their church and charitable gifts. They give $15,000 each year in combined church and charity donations. Adding these two figures together, you get $12,000 + $15,000 = $27,000. That’s no higher than their standard deduction for 2019, so they will get no tax benefit from their charitable donations. Their tax outcome would be the same whether they had given to charity or not. They might as well just claim the standard deduction and file the short form when doing their taxes. 

What’s the solution? Advisers recommend making two years worth of donations in a single year and then skipping donations the following year. This strategy is called bunching. Let’s see how this would help our hypothetical married couple in the above example. For 2019, the couple decides to give $30,000 to church and charity, double their normal amount, with the intention of giving none the following year. Over the course of two years, their total giving remains the same, but the tax picture looks much better. For 2019, their itemized deductions are now $12,000 + $30,000 = $42,000. Since this exceeds the $27,000 standard deduction by $15,000, they can benefit from itemizing. If they are in the 15 percent tax bracket, bunching could reduce their 2019 tax bill by $2,250, enough to pay for a cruise the couple wants to take.

Is It Time to Stop Writing Checks to Charity?

Writing a check isn’t always the best way to give to charity. Donating appreciated stock or making IRA charitable withdrawals, as shown above, will likely be more advantageous for most senior donors than just writing checks. If you typically make a $10,000 year-end contribution to your favorite nonprofit each December, do it through your IRA or by donating appreciated stocks rather than writing a check. Even if you normally give on a weekly or monthly basis, such as to your church or other place of worship, they will be glad to accept a one-time annual gift instead. For example, if you normally give $100 per week to your place of worship, you can give an annual donation of $5,200 from your IRA instead. Better yet, round up or give a larger amount.

Alternatively, rather than simply replacing cash donations with these new, more tax-favored giving methods, you may want to use this opportunity to significantly step up your philanthropy. Keep writing those weekly or quarterly checks, but add to it a new year-end donation from your IRA to fund a special cause or campaign. Jesus was right (of course) when He said it is more blessed to give than to receive. There is nothing more rewarding than helping support a cause that is near and dear to you.

Other choices for charitable giving

Visit with a development or planned giving officer at the nonprofit of your choice and you will discover even more ways to give creatively and reduce your tax burden. Your tax or financial adviser can also be of assistance. Here are a few of the popular choices:

• Donor Advised Funds. An increasingly popular method of making charitable gifts is through a donor-advised fund, of DAF. These funds allow you to make a sizeable charitable donation to the fund and then designate the proceeds to one or more charities over a more extended time period.  Fidelity Charitable and Schwab Charitable are two of the leaders in donor-advised funds.
• Private Foundations. Similar to a DAF, but typically for much larger planned donations, is a private foundation. You can learn more about private foundations from the Foundation Source.
• Trusts. Your legal and tax advisers can also share with you a number of special types of trusts that can help you give larger amounts more efficiently, in some cases providing additional income for life or significant tax benefits. Your nonprofit’s development or fundraising office may have information on their website or in brochures to provide you a better overview of trusts.
• Charitable Gift Annuities. These special annuities provide lifetime income and tax benefits to the donor in exchange for a one-time, lump-sum purchase.They appeal to retirees who want more income in a relatively safe investment that is not affected by the ups and downs of the stock market. Unlike traditional annuities that are issued and backed by insurance companies, charitable gift annuities are typically issued by the nonprofit organization itself.

Closing thoughts

Before wrapping up this discussion, it’s important to note that while there’s nothing wrong with trying to maximize one’s tax benefits, hopefully most of us are not giving to charity just to obtain a tax break. Tax laws come and go, and whether church and charitable donations are tax favored or not, they are beneficial to society, to the causes we support, and ultimately to us, the givers.

Nonprofits play a vital role in the welfare of our nation, supporting religious and educational institutions, and helping the poor, the sick, and those who have been abused, abandoned or neglected. As givers, philanthropy makes us better people, fulfilling a deep-seated need to do our part to leave the world a better place. We hope you will give first and foremost because nonprofits provide valuable services and need our generous support. Tax benefits, while nice, are secondary.

Finally, we hope that when giving you will not neglect the network of small nonprofits that exist in every community, large and small.  We have nothing against giving to some of the better-known, national “brand names” of charity, but keep in mind that it is the smaller, locally based nonprofits that make your community a better place to live. They don’t have the large advertising budgets of the big guys.  They can’t afford celebrity endorsements or glitzy media campaigns. But the work they do is just as important, and they need our support.

If you have questions or comments, we’d love to hear from you. Please scroll down to leave us a comment.

Note: As with any significant investment or tax decision, we recommend you seek professional advice before taking action. This column is for informational purposes only and is not to be construed as offering tax or legal advice.