Hello everyone! It’s time for your annual reminder that today is Giving Tuesday, the biggest non-profit fundraising day of the year. Thousands of companies donate to provide matching dollars for donations to any number of 501(c)3 non-profits, raising billions annually over the past several years that the event has occurred. I, for one, elected to donate to the Longmont Community Foundation and its fund for the Longmont Area Chamber of Commerce, which has been fundraising for a renovation and rebuild of their downtown location since the hailstorm in May destroyed their roof, and the subsequent leaks have ruined a great deal of the building’s internal space. However, this is not simply a post to encourage you to donate to the chamber’s rebuilding fund, but to talk about some of the mechanisms and means of charitable donations and how your dollars can serve good and defeat taxes simultaneously.
One Big Gift > Many Small Gifts
While many employers offer donation programs and the ability to “subscribe” to charities, a secret of the tax code is that it’s often going to be more beneficial to bunch up your donations. This is because charitable donations simply often don’t get counted for tax purposes. Claiming a deduction for a charitable donation only takes effect if your donations, on top of other factors such as mortgage interest and local taxes, add up to more than the standard deduction. With a deduction north of $13k and $27k for singles or married couples, it’s simply uncommon that this happens. However, if you plan to make multiple gifts over time and have the cash on hand, bunching several years of donations into a single year can help you get over the standard deduction threshold and actually see some tax savings in that year from doing so. However, one must be careful to consider the impact of limits on donation deductions.
Not All Donations Are Made Equal
Simply put, not all donations are made equal. Donations made in cash can be counted against income in a given year up to 50% of your total income. So, for a taxpayer with $100,000 in income for a given year could donate up to $50,000 in cash and receive the full benefit of the deduction. However, if the same taxpayer wanted to donate $50,000 in property, such as a car or piece of land, they could only deduct up to 30%, resulting in a $20,000 donation carry-forward into the next tax year. The result is that the donor may not get all of the potential deductions from their gift!
Another example to consider is that of donating investments. Many investors demonstrate good investing behavior and buy and hold their investments for a long time, resulting in some winning investments that have gained a lot of value. The consequence, then, is that there can be a very large amount of capital gains built up in their position. How best to deal with this when being charitably minded? Donate the investments rather than the proceeds. For example, if someone bought a stock for $50 and it’s worth $150 today if they sold it, they would have to pay capital gains tax on the $100 of profit, leaving them with anywhere from $126.20 to $150 to donate. However, if they donated the stock instead, they could get a deduction for the full $150 value of the stock, and everyone wins. The taxpayer gets a bigger deduction, the charity gets a bigger donation, and everyone pays less taxes. Huzzah! However, be mindful that the 30% limitation on income applies to stock donations.
What if we’re not ready to give all the money away at once?
While the mechanisms of bunching donations together for tax benefits are great, this can leave donors in a tricky spot. Do they really have to write one big check to one cause all at once to see the benefits of bunching? What if it’s too much money, or you’re not ready to give the non-profit that much money all at once? Enter the “Donor Advised Fund,” which is an account held by a qualified 501(c)3 non-profit, typically a foundation, which can provide you with a mechanism to make the donation all at once for tax purposes but then also to break the gift out over time to various causes, rather than simply giving all the money at once. This gives you the best of both worlds, both in the form of greater tax deductions from big donations but also with greater control over the donation. Most major custodial institutions offer a donor advised fund platform, including Fidelity (Fidelity Charitable), Charles Schwab (Schwab Charitable), and Vanguard (Vanguard Charitable), so you needn’t even move money too far from where it’s currently resting.
Should I not donate if I don’t get a deduction?
It’s a fair question, and I hear you in the back saying “But I don’t just have $13,000+ dollars lying around to give this year!” And you’re absolutely right to say so and to ask the question. But the simple answer is: Of course not; you can always give to causes you care about, the taxes be damned. Never let the tax tail wag a charitably minded dog, so if there is a cause or there are causes that you care about, take the time not only to support them financially and with your volunteer efforts not just today but throughout the year. While Giving Tuesday is a famously important day for donations, non-profits typically run year around, and can always use the help of the good people who support their cause.
Disclosure: Daniel M. Yerger is a volunteer for the Longmont Area Chamber of Commerce board of directors. Daniel is not paid for his time on the board, nor does he receive any direct or indirect compensation for his volunteer service.