By Robert Fragasso & William Taylor, Fragasso Financial Advisors
The holidays are not only a time of celebration, but also a time of thankfulness and recognition. The spirit of the season, as well as the closing of the current tax year, often motivates people to contribute to charitable causes. But before donating this year, there are certain measures individual donors should take to ensure their donation satisfies both the tax and emotional advantages charitable giving can bring.
Identify the right fit
One of the most crucial issues for donors is finding a cause that has personal significance to them. If a donor does not already have a connection to a cause, we always recommend using the many resources available online to find the right fit. Sites such as GuideStar and Charity Navigator are two of the best tools available to assist in the research phase. These outlets can help narrow options by connecting users with organizations that are both reputable and IRS-qualified.
Make sure your donation is allocated appropriately
In addition to understanding how to choose the right charity, we also urge our clients to make sure most of the donation goes to the cause itself, rather than administrative expenses. While these expenses are certainly necessary, some donors prefer their contributions be allocated toward a specific initiative or portion of the charity. This can prove to be challenging for most, and oftentimes, charity contacts do not have control over where a gift is spent.
In this scenario, persistence or increasing the gift amount often pays off in ensuring a gift goes to the right place. Consider contacting the director of the organization to discuss your reasoning and plans for your contribution. Providing some personal context can help the director justify your request.
Understand how much you can afford to give
When mapping out a charitable gifting plan this year, individuals should evaluate their monthly cash flow, upcoming expenses and emergency funds first to ensure they are in a financial position to give. It’s also important to remember you only realize the tax benefits of your donation when you give to a charitable organization. Gifts to individuals do not provide a tax deduction.
As a general rule, most financial planners advise that individuals should never donate more than 50 percent of their adjusted gross income. This method not only prevents people from spending beyond their means, but it also ensures that their gift will qualify for a tax deduction.
Create a tax-advantaged gifting strategy
If you have an annual gifting strategy in place, it’s important to consult a financial professional to ensure you are donating in a way most advantageous to you from a tax standpoint. Here are a few ways to give that we often recommend to our clients:
Donate appreciated stock directly to charity: Another way to donate at this time of year is to give appreciated stock directly to a charity. Using this strategy, the donor receives a deduction for the fair market value of the appreciated stock, and the charity (as a tax-exempt organization) can then sell the stock without paying tax on the capital gains. Certainly, not everybody has the means to gift stock, but if it is possible, this method has many advantages over simply donating cash.
There are limitations to this, however. Because appreciated holdings are capital gains property, an individual gift is limited to 30 percent of a donor’s adjusted gross income, while the normal cap for simply gifting cash to charity is limited to 50 percent of a donor’s adjusted gross income. This method is often viewed as the most tax-efficient model for gifting to charity because the donor receives the tax deduction for the fair market value of the gift, while avoiding the capital gains tax on the appreciated stock. For specific tax advice, individuals should consult a qualified tax professional to devise a plan that suits their personal goals.
Donate your required minimum distribution from your IRA directly to charity: The tax rules of charitable giving are slightly different for those who have IRAs and are over the age of 70½. IRA contributors in this age group are required to take the minimum distribution and are able to give up to $100,000 a year from their IRA to charity. The distribution, however, has no effect on the donor’s adjusted gross income because the money is going directly to a charity – technically, this is called a qualified charitable distribution.
It is important to note that everyone’s situation is different, given his or her financial outlook and specific charitable intentions. Regardless of circumstance, gifts made to good causes both during the holidays and throughout the year are often rewarded in both concrete and emotional ways.
Securities offered through LPL Financial, member FINRA/SIPC. Investment Advice offered through Fragasso Financial Advisors, a registered investment advisor and separate entity from LPL Financial.
Bill is Fragasso’s advanced estate planning and business planning manager, assisting Fragasso’s financial advisors to help uncover their clients’ estate planning and business succession needs as part of their holistic financial plan. Bill’s primary role is to act as a support to the advisors and to collaborate with clients’ attorneys, accountants and other advisors to coordinate financial planning strategies. Previously, Bill worked with high net worth clients as a staff attorney at AYCO Company. He also spent time with the New York State Department of Taxation and Finance as well as providing estate and Medicaid planning at a local law firm.
Bill grew up in Framingham, Mass. He joined the Army at 18, during which time he was stationed in Germany and Alabama. He earned his bachelor’s degree in political science from U. Mass at Amherst, his Juris Doctor degree from Western New England College School of Law and his Master of Laws in taxation from Boston University School of Law. After law school, Bill moved to upstate New York and lived there for 12 years before moving to Pittsburgh. He enjoys running with his dogs and doing Crossfit with his wife, Christine. Bill is an avid sports fan and enjoys snowboarding, especially in Telluride, Colo.
