I guess I should not have been shocked when I walked into a ‘big box’ store on October 1stand was visually assaulted by the significant display of December holiday decorations. Numerous yard inflatables, string lights galore, and even ornaments, garlands, and wreaths greeted me at the entrance!
My offense to this visual barrage of consumerism began to wane as I realized a few things. First, we are a society of planners. So many of us are already beginning to write holiday gift lists, plan menus, and make travel plans. Why shouldn’t retailers take advantage of our own advance planning?
Second, in the financial planning industry, we begin discussing year-end matters, such as deferring income, harvesting tax losses, and adding to 401(k)s, well before the end of the calendar year (see Larry Crimmins’ blog “It Is Never Too Early to Start Year-End Planning” for more information).
Last, and certainly not least, I do not believe donors begin such early planning for their year-end giving, nor do the charities promote their giving opportunities early enough.
In an effort to give individuals and charities some advance tools, I provide the following considerations as financial planning clients continue their year-end planning, and as donors consider the many different ways of giving in 2016.
IRA Charitable Rollovers
In December 2015, both the Senate and House passed, and the President signed into law, the Protecting Americans from Tax Hikes (PATH) Act. The Act made permanent many tax provisions, but for individuals with philanthropic interests, it made permanent the IRA Charitable Rollover provision.
This provision allows a taxpayer age 70 ½ or older to transfer up to $100,000 annually from his/her IRA account directly to charity without first having to recognize the distribution as income. In addition to the short-term appeal of not paying income-tax or potentially having the assets subject to estate tax in the long-term, something that may be attractive to donors is that this provision can satisfy the required minimum distribution (or RMD). However, gifts to donor-advised charitable gift funds, supporting organizations, and most private foundations do not qualify for these charitable IRA transfers.
This type of giving may be particularly attractive to philanthropic individuals (over the age of 70 ½) with adequate sources of alternative income who want to see their charitable contributions making a meaningful difference while they are still living.
An appealing option for donors of any age is gifts of appreciated securities. This method of giving is attractive because the individual can deduct the fair market value of the stock or mutual fund and will not owe taxes on any appreciation (capital gains). In general, the amount of your deduction is limited to 30% of the donor’s adjusted gross income (AGI), but amounts above that can be carried forward for up to five years. The securities must be donated directly to the charity, rather than selling the security and gifting the cash. Additionally, the securities must have been held for more than a year.
Donating by Cash or Check
Donations made by cash or check are still the most common ways to give. A donor must have a bank record or acknowledgement from the charity in order to deduct the gift. Unlike gifts of appreciated securities, the individual may claim a deduction of up to 50% of his/her AGI.
Goods and Services
The needs in our communities are great. There are so many nonprofits organizing toy, food, and clothing drives. The IRS generally allows an individual to claim a deduction for the amount he/she would get by selling the item.
For charities that accept gently used items, the following guide is provided by Goodwill Industries International and provides estimated price ranges for items donated in good condition:
Whether someone is donating new or gently used goods, it is best to make sure the organization accepts the donated item(s) and inquire about the guidelines they expect donors to follow. In either instance, a receipt from the charity is necessary if the donor wishes claim a deduction, especially if the value of the goods exceeds $250. The IRS requires a qualified appraisal for any single donated item for which the individual is deducting more than $5,000.
In conclusion, philanthropic giving is mostly driven by an individual’s connection to the organization, its mission, and the work it does in the community. Year-end giving is an important strategy for nonprofits as the holiday season generally inspires people to help those less fortunate than themselves. A donor may have money left over in her philanthropic budget or may simply be seeking some tax benefit. In any case, it is important for individuals to understand the basic requirements of deductibility, especially that a deduction is only applicable if deductions are itemized.
Regardless of donor motivation or the timing of charitable gifts, it is advisable to consult a financial advisor or accountant when there are questions about the deductibility of your charitable gifts.