Now that the holidays are in full swing, many clients have begun to focus on charitable gifts they'd like to make before the end of the year.
While a charitable income tax deduction may increase the amount a client ultimately gives to charity, I find that regardless of the tax incentive, the charitable spirit is usually the driving force. Here are a few ways to help clients maximize both the charitable and tax benefits of any gift.
1. AVOID GIVING CASH
All charitable donations must be substantiated (such as with a receipt, cancelled check, or written acknowledgement received from the charity) in order for the deduction to be taken. Many clients do not realize that this requirement also pertains to cash donations.
So remind individuals who toss money into a container in front of a supermarket, mall entrance or the local donut shop that they cannot deduct those amounts unless they receive a receipt -- something I almost never see.
Donations made by check can be deducted if postmarked by Dec. 31 -- although for donations in excess of a few hundred dollars, best practices would dictate that the charity receive and cash the check prior to the end of the year. Because online donations made by credit card get processed instantly, clients may want to consider making year-end donations in this manner.
Also don't forget that larger donations ($250 or more) require more rigorous contemporaneous written acknowledgement in order for clients to take the deduction. The acknowledgement must list the name of the organization, the amount of the donation (or description of goods donated), the amount of the donation and whether any goods or services were received from the charity in exchange for the donation.
2. CONSIDER THE DONATION SOURCE
Remember that not all donations need to come from the checkbook. A client called me recently to discuss her elderly father's estate plan. The father had a specific donation he wished to make, and he also has a large IRA.
I suggested that they consider the IRA charitable rollover, which counts toward any required minimum distribution amount and will also be excluded from taxable income. Until the end of this year, individuals over 70½ can "roll over" (i.e., distribute) up to $100,000 from their IRAs directly to qualified charities -- a label that includes most public charities, although not all of them. This tax benefit will expire at the end of the year, however, unless Congress acts.
Another option for clients either under 70½ or without substantial IRA funds is to give appreciated securities traded on a public market -- which, as always, will qualify for a tax deduction at their full fair market value.
3. UTILIZE DONOR-ADVISED FUNDS
Because donor-advised funds are themselves public charities, they allow individuals to set aside amounts for charities and obtain a charitable deduction, while they delay choosing a specific charity or purpose to benefit. Donor-advised funds can also be used in place of a family foundation to help create family legacies.
A client of mine wished to set aside an amount for charity that was substantial -- but not quite substantial enough to justify creating her own foundation. I suggested that she use a donor-advised fund. Now, every year at the holidays she gets together with her nieces and nephews and gives each a specific amount to decide where to donate.
Not only does this allow her to teach her nieces and nephews about the joys of charitable giving, but she has also created a family holiday tradition; the only cost is the annual administrative fee charged by the donor-advised fund.
4. THINK LOCALLY
Local contributions used to be primarily focused on food banks -- but no longer. There are literally hundreds of community foundations across the United States.
Community foundations focus on local needs, helping donors identify where the needs are the greatest and how to make the most impact, even with relatively small contributions. In addition, many community foundations now have donor-advised funds that function in much the same way as the large, commercial donor-advised funds.
So, if you find your clients thinking locally at this holiday time, don't forget to steer them in the direction of your local community foundation. The Council on Foundations provides information on community foundations and has a handy guide to help locate the ones in your area.
5. SCRUTINIZE RECIPIENTS
This shouldn't need repeating, but with new charitable organizations popping up every day, it bears another reminder. CharityNavigator.org, which has excellent tips for donors, can also help advisors and clients check out charitable organizations to ensure that donations are being used as promised.
Its wise to avoid charities that use paid fundraisers, who tend to receive a relatively large percentage of the funds they raise. CharityNavigator also suggests that charities should spend no more than 25% of expenses on fundraising and administrative overhead.
Estate planning attorney Tracy Craig is partner at Mirick O'Connell and chairwoman of the firms trusts and estates group. Follow her on Twitter at @TracyACraig.
- Estate Plan Design: 5 Key Questions for Clients
- 10 Essentials to Know About Donor-Advised Funds
- Spike in Charitable Donations Creates Advisor Opportunity
- Donor-Advised Funds Outperforming Family Foundations
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