The majority of U.S. households donate to charity, according to the most recent data from the Indiana University Lilly Family School of Philanthropy. Although our reasons for donating may vary, a plan can help all of us successfully make charitable giving a part of our financial lives.
In a small strip mall located in the lakeside town of Saint Clair Shores, Michigan, you’ll find children getting haircuts. But, this isn’t an ordinary barber shop or salon. Though you can’t tell, it’s not their own hair that’s being trimmed and styled. They’re wigs. But, these aren’t ordinary wigs. They’re specially crafted wigs made from donated human hair. These wigs serve more than a cosmetic purpose; they are important sources of comfort and confidence. While these are ordinary kids, they are also more than ordinary. They are fighters and survivors.
Without a doubt, giving back can make a real, positive impact in our communities. Which is why it’s a common part of many people’s financial lives. A report by Giving USA found that individuals, estates, foundations and corporations gave $390 billion to charities in 2016.
So, what’s important to know about charitable giving to make it not only a yearly, but lifelong financial goal?
The benefits of charitable giving
First of all, it’s helpful to understand the tangible benefits of giving back, no matter if it’s your time and energy or actual assets (cash, securities, property, etc.).
For instance, volunteering appears to be good for both your physical and mental health, according to a study published by United Healthcare and VolunteerMatch. Three-quarters of the U.S. adults surveyed said volunteering made them feel physically healthier, and nearly everyone said volunteering improved their mood. Other commonly reported benefits included a boost to self-esteem (reported by 88% of respondents) and lower stress levels (79%). For retirees, in particular, volunteering provides a sense of purpose.
By donating cash or other assets, you can write off your donation and lower your tax burden. This is especially helpful in a year you are experiencing large capital gains. However, the 2018 Tax Cuts and Jobs Act raised the standard deduction, which means it may make less sense for some people to claim deductions, such as charitable contributions.
What to give back
For a charity, what you give is generally of no consequence provided it is able to accept and process your gift. For you as a donor, what you give has various tax implications.
By donating cash, you receive a tax deduction for the total amount, up to 60% of your adjusted gross income. Meanwhile, a gift of appreciated securities or property held for a year or more allows you to deduct the fair market value on your income tax return.
Appreciated securities and property
A gift of appreciated securities or appreciated property (real estate, art, automobiles, etc.) held for more than one year allows you to take a deduction for the fair market value of the securities or property on your income tax return while avoiding recognition of capital gains.
When to give back
It can be argued there is never a bad time to give back. This is certainly true when it comes to donating your time and energy. As for gifting assets, there are several factors to take into considerations that can affect either the recipient or the donor.
At certain times, some charitable organizations may not be in the position to receive certain gifts. For example, a small, newly formed charity may not have the capacity to acquire and sell a piece of property.
Your personal financial needs and goals will also determine the optimal time to make donations. Not to mention the variety of tax and estate planning factors that must be assessed. You may want to give more during your peak earning years, to maximize the potential tax deductions, if you expect a lower income in the future, such as when you retire.
The variety of personal factors involved is why working with a financial adviser is recommended to help ensure your charitable goals are successfully implemented into your current and future financial life.
How to give back
There are a variety of ways to make a charitable gift, ranging from the very simple to more complex. The most common strategy is to make direct, immediate donations, whether from writing a check or transferring it from a qualified retirement account.
Always make sure the non-profit organization is a 501(c)(3) public charity or private foundation. Also, get a receipt. When it comes to giving charitable gifts in excess of $250, a paper trail is required.
A qualified charitable distribution allows IRA owners who are 70 ½ or older to transfer up to $100,000 a year directly from their IRA to charity. That transfer is excluded from the IRA owner’s income and, if done correctly, counts toward the owner’s required minimum distribution. The key is that the distribution is directly transferred to the charity. That means, if the IRA custodian makes a check payable to the IRA owner who then endorses the check to a charity, it is not qualified.
Other, more complex ways to make charitable gifts include bequests, charitable trusts and donor-advised funds. These charitable giving strategies are not suited for everyone and should be considered with the help of a financial adviser.
Even when it comes to charitable giving, there is no right way to give back. It depends on your personal situation. With a plan, you can make sure your gift can have the greatest impact on your community and your financial life.