As markets continue to reach new highs, many baby boomers are experiencing a boost in their portfolios, creating more opportunity for gifting those ‘extra’ returns. According to the Blackbaud Index, about 34% of all charitable giving is done in the last three months of the year, and of those donations, about 18% are given in December alone.
Continue Reading Below
The holiday season can be a difficult time of the year for those who are in need. Many of us look for ways to reach out to the needy in an effort to make their holiday season a little brighter. Share your blessing – through charitable giving you can support a worthy cause while giving something back, and it may even limit your tax liability.
Dave Richmond, CFP, President of Jackson, MI-based Richmond Brothers discussed the following options for boomers looking to give and benefit from tax focused charitable donations:
Boomer: What options are available for individuals seeking to give and benefit from tax-advantage contributions?
Richmond: There are a number of strategies available to investors who are looking to benefit from tax-advantage contributions. One option is a donor-advised fund, typically established by major brokerage houses for their charitably inclined investors. The fund effectively plugs investors into the brokerage’s economies of scale for a less expensive option than setting up one’s own foundation. The donor-advised fund is a great strategy for individuals with a few hundred thousand dollars in savings and a desire to make a lasting impact.
Another option is directly gifting appreciated stock you’ve held for over a year to the charity of your choice. You may then take a charitable tax deduction for the market value of the stock, and neither you nor the charity has to pay capital-gains taxes when the stock is sold. A win-win for you and the charity!
Boomer: How can Baby Boomers be sure that the charity they give to actually does the things they tell you they will do with your donation?
Richmond: The best kind of giver is the informed giver, as they donate their money but hold the charity accountable for what they receive.
There are a few ways to channel-check what a charitable organization says it does. First, you can check third party "ratings" sites such as Charity Navigator or Guide Star for smaller organizations. In today's world of technology, everything happens at the drop of a hat—reviews are done, comments made, and the word is spread. These third-party sites will include an organizational breakdown of expenses, how much goes to the pockets of administrators, how much goes to the programs they raise money for and how much goes to fundraising. Some of this information can be shocking—where 80% goes to fundraising and 20% or less goes to the programs it supposedly supports. It’s important to conduct due-diligence on the charities you support.
Another way to ensure your money is going to a reputable charity is by requesting the charity's tax return (Form 990). When reviewing this document, check to see if all of their filings are up to date, what they have raised and spent, endowments outlook, etc.
Boomer: Once a contribution is made to a charity how can the donor get feedback of the charity’s results?
Richmond: Most charities welcome the opportunity to talk to their donors, whether it is by phone or electronic communication. This information can also be found in the charity’s Form 990 and you can circle back with the aforementioned charity evaluation sites.
Many charities also send quarterly or annual reports to donors to highlight their progress. For more timely updates on recent activity, check the charity’s website and social media channels.
Boomer: What is the difference between a non-profit and a charitable organization?
Richmond: This is where things can get a little complicated. The terms “non-profit” or “not-for-profit” refer to organizations that have been chartered at the state level. Typically, this means they have filed some sort of formation document with the Secretary of State’s office, and has a separate legal existence from its members. Just because an organization has registered as a non-profit or not-for-profit organization with the state, however, does not mean that it has obtained tax-exempt status, either from the state taxing agency or from the Internal Revenue Service.
There are 27 different subsections of Internal Revenue Code Section 501(c), and three additional sections of the Internal Revenue Code under which a non-profit can be classified as “exempt” from income tax. A “charity” is this type of organization in that it is exempt from federal income tax under the Internal Revenue Code.
Charities must be a formed organization whose organizational documents meet certain requirements under IRC Section 501(c)(3). These can include organizations that are for purposes that are religious, charitable, scientific, testing for public safety, literary or educational, to foster amateur sport competition, or for the prevention of cruelty to animals or children.
A “public charity” is one subsection of these charities that is classified further under a different provision of the Internal Revenue Code based on its activities or under one of the various public support tests. These organizations typically get a large portion of their support from the general public.
Boomer: What is the difference between a tax-exempt and a tax deductible donation?
Richmond: There can be charities who are non-profits and don't pay taxes themselves (they are tax exempt), but that doesn't mean contributions made to them are tax deductible.
It is important to always conduct due diligence to ensure your contributions are going to a charity that has historically followed through with its stated intentions and, of course, offers the valuable tax deduction.