Philanthropy, giving gifts to charity, can be one of the best ways to create tax savings for your income, and donor-advised funds could be a great piece of your strategy. Learn the rules, regulations, and requirements of charitable giving for tax savings.
Making charitable donations used to be as straightforward as writing a check or donating stock to your favorite non-profit organization. Wealthier individuals could start their own foundations to support favorite causes.
Times—and tax codes—have changed philanthropy. E-commerce has enabled new ways to give, and the 2017 tax reform legislation changed how charitable contributions function within tax strategies.
In light of these changes, let’s look at the modern ways to give to charity.
The traditional method of writing a check or donating securities to charity with an immediate gift still works. However, other ways to make donations to charity are becoming popular. Two ways are crowdsourcing, such as giving money to GoFundMe accounts, or giving through Facebook (FB).
There are a few factors to consider when donating through GoFundMe. First, unless the recipient is a registered 501(c)(3) charitable donation, the donation isn’t tax-deductible. Second, if the recipient isn’t a registered charity, you need to do some real due diligence before opening your wallet, according to Steve Pike, product manager at TD Ameritrade.
“Many of these GoFundMe accounts are for someone who has had a tragedy in their life, but you don’t know any more than the story on the page,” Pike said. It’s possible to come across “a bad apple” who might not be honest, he notes, among the overwhelming majority of sincere, clear and urgent need. Donors have little recourse once money is given.
Many people give to charity through Facebook. The social media giant uses Facebook Payments to process charitable donations, and it also works with Network for Good and PayPal Giving to accept credit card donations for thousands of legitimate non-profits. Network for Good is a donor-advised fund (DAF) that distributes the money to the charities.The concept is similar to the traditional way of donating to charities. But the added social media aspect allows the donor to easily tell friends about their cause.
Pike pointed out that unlike family foundations, which are essentially out of reach for most people, DAFs have a lot of the benefits people want when it comes to charitable giving and are more accessible to the average person. It’s one of the best ways to give to charities.
“Donor-advised funds are set up for the small donor. The transaction is quick and easy and really efficient,” Pike said.
Organizations that help people set up donor-advised funds are called sponsoring organizations, and they hold the donors’ assets.
Pike explained that people who give to a donor-advised fund can take an immediate tax deduction of up to 60% of their adjusted gross income for cash donations. For securities, that figure is 30%. Whether the donation is securities, cash or both, you must itemize in order to take the deduction.
No matter the asset, donors still must itemize. As a reminder, the standard deduction for 2019 is $12,200 for single filers and $24,400 for married people filing jointly who are younger than age 65. To itemize deductions, filers must have expenses in excess of those amounts.
Looking to fund your retirement and a charity? Consider a charitable remainder trust, another excellent way to give to charities. These trusts are funded with assets, and the trust pays you income over time. Whatever is left after your passing goes to charity. Donors can put cash in the fund, but also assets that have greatly appreciated in value. Once assets are moved to the trust, they’re removed from your estate and not subject to estate taxes once the trustee dies.
If you want to keep some cash in the family, consider ways to support children and grandchildren directly. People who have children with special needs should carefully weigh setting up a special needs trust, which helps the beneficiary without affecting eligibility for government benefits. A trust allocates inheritance assets to the special-needs child through a third party. A designated trustee handles management, control, and tax-filing after the parent’s death. This kind of trust is complicated to set up, so it’s best to consult a tax advisor.
Planning for kids, grandkids, or other children in your family? Set up a 529 plan to give the gift of education. There’s no minimum annual contribution you can contribute up to $15,000 per child, without triggering federal gift taxes. If you’re married and filing jointly, you can contribute up to $30,000 per beneficiary. Also, since you can count the current tax year and four annual gifts for future years, you can contribute up to $75,000 in a single tax year ($150,000 if married filing jointly) without incurring federal gift taxes. This can be particularly effective if you plan on “bunching” deductions—taking the standard deduction in some years and itemizing in others.
Though technology and tax codes have changed some of the ways in which we give, the nature of giving hasn’t. It’s still about striving to make the world a better place by supporting the cause or causes you believe in—across town or across the world.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regards to your personal tax situation.
Use this checklist to help make sure your estate plan wishes are known and necessary documents are in place.
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