Be diligent when making charitable donations

Casey Bear |

Charitable giving can be a rewarding part of many wealth management plans.  Not only does it feel good to help worthy causes, your monetary or asset donations to qualified charitable organizations may be used as a tax write-off.  However, recent tax law changes enacted with the 2017 Tax Cuts and Jobs Act have drastically reduced the ability of some taxpayers to itemize deductions. Coupling that with the proliferation of phony charitable appeals online, now more than ever, donors must carefully and diligently plan their giving strategy.  

“Gift Lump” to realize tax benefits

Itemized deductions can be used to the benefit of the giver when charitable donations are above the standard deduction level for the tax year.  Changes in the tax law have moved the standard deduction amounts higher while decreasing the types and amounts of state and local taxes that can be deducted, among others.  The result is that many smaller gifts don’t exceed the standard deduction and taxpayers “lose” the tax benefit of giving in that year.  

One strategy to maximize the write-off potential of a charitable donation is to plan your giving in “lumps” by year.  Consolidating several years of giving into a single year, especially with (appreciated) assets available to front-load charitable contributions into a donor-advised fund, can produce a material tax savings.  Bunching donations in this way requires thoughtful planning and must always be considered within the context of your overall wealth management strategy.  

Always verify the recipient

It’s crucial to verify the recipient is authentic and will allocate the funds properly, particularly when giving online or to unfamiliar organizations. Always check the charity’s name against a credible database of 501(c)(3) organizations. The IRS Tax Exempt Organization Search Tool can help confirm that you can write off your donation. There are other types of organizations that accept contributions and allow you to take a deduction as a business deduction, not a charitable contribution. Either way, the ability to accept deductible donations is a key qualifier of a legitimate charity.

Even if a charity seems legitimate, it may not be effectively helping the cause(s) it represents. Ask to see annual reports and documentation which show how a charity allocates its funds. The Charities Review Council recommends that at least 65% of a charitable organization’s total expenses go toward its programs.  Overhead is necessary, but just make sure that it’s not the only thing donations are being used for.

By spending time creating a charitable giving plan, you can help ensure your money is going to a worthy cause and can be used as part of your tax strategy, if desired.  If you have any concerns about your charitable giving strategy, or want to discuss how charitable giving fits into your overall wealth management plan, contact the investment professionals at Cranbrook Wealth.