The ongoing recession has made life difficult for many Americans. But it has been particularly hard on the nation’s charities — and their beneficiaries, those who are the most unfortunate among us. According to the IRS, Americans gave 10.6% less to charity in 2008 than they did in 2007 and 14% less in 2009, to the tune of $60 billion fewer donations during those two years than in 2007. That makes it a particularly good time for those of us who are philanthropically inclined to reassess our ability to give and to review some of the best ways to make our giving go further.
First, ensure that your and your family’s needs are adequately funded. A financial planning review can perform stress tests on your portfolio:
The results of either or both analyses should help you establish an appropriate and affordable level of giving, even if it’s less than it has been in the past. After honestly assessing the numbers, if a cash contribution is inadvisable this year, consider volunteering the equally valuable gift of your time.
With numbers in hand, establish a giving plan, even if it’s just an outline or a schematic. Address basic concepts, like:
Craft a simple mission statement for your philanthropy against which you can check the consistency of your various philanthropic activities over time.
As sacrosanct as the income tax charitable deduction appears to be in the political discourse, it is worth remembering that the deduction is only available to those who have sufficient total itemized deductions to exceed the standard deduction — currently $5,800 for single taxpayers and $11,600 for taxpayers who are married, filing jointly. (According to the Congressional Budget Office, approximately 30% of taxpayers itemize and approximately 80% of charitable contributions come from itemizers.)
Besides the need to itemize, there are other limitations on the ability to take a charitable deduction. First, of course, the charity must be registered with the IRS as a 501 (c) (3) organization. While fully deductible, deductions for cash gifts to public charities, are limited to 50% of Adjusted Gross Income (AGI), or 30% if to a private foundation. Excess deductions may be carried forward for five years. The deduction for appreciated property is limited to 30% of AGI for public charities and 20% for a private foundation. However a donation of appreciated property will spare you the recognition of capital gain if you were to first sell the property and then donate the sales proceeds. By contrast, for property or securities that have lost value, you are better off selling first, realizing the loss for tax purposes and then making the contribution.
There are also rules related to maintaining receipts and records for all but the smallest of gifts and donations. For donations of property above $5,000 in value, you must obtain a written appraisal to substantiate the value. It is wise to obtain advice from your tax advisor on these more complex matters.
Money held in an IRA can be an excellent resource for making charitable contributions. For the past several years and continuing into 2011, If you are over 70 1/2 years old — subject to required minimum distributions (RMDs) — Congress has allowed a charitable contribution of up to $100,000 directly from your IRA to a qualified charity. This will count toward your RMD. You can’t take a deduction, but you won’t ever have to pay taxes on this income, including both your original retirement contribution and the appreciation in the account.
You also can use your IRA for charitable intent within your estate planning. A straightforward technique is naming a charity as a beneficiary. This will immunize the IRA from the income taxes that would otherwise have to be paid when your spouse, children or other heirs take mandatory withdrawals after your death. If you want just part of your IRA assets to go to charity, you can split accounts, naming charities as the beneficiaries of some, and family or friends as the beneficiaries of others. And if your estate is large enough to be subject to the estate tax, your estate will receive an estate tax charitable deduction for the donation.
For now, I will not go into the details of the myriad advanced planning techniques available by using various kinds of trusts, donor-advised funds and foundations. For additional insights on these and other components of effective philanthropy, I recommend Tracy Gary’s approachable read, “Inspired Philanthropy.” In addition, for those of you who have substantial resources and a charitable intent, assembling a team of trusted advisors is key to ensuring that your good intentions are well and fully integrated with your estate plans.
Philanthropy is intensely personal, from determining how much you may be willing and able to give, to naming your recipients. But there also are a few universal qualities to philanthropy. It provides badly needed resources to shared human interests such as science, the arts and caring for the less fortunate. It has been shown to improve your own physical and psychological health in your role as a valued donor. And properly implemented, your philanthropic planning can even serve as an inter-generational bond between you and loved ones whom you wish to engage in both legacy goals and your most cherished causes.
Few other pursuits in life can build so many bridges at once, so if you haven’t reviewed your charitable activities lately, there may be no time like the present.
Steve Smith, Principal of Right Path Investments is here to guide you with preparations to take your next step. If you're ready to take that step, schedule some time for a one on one with Steve today.