Maximizing the Deduction Value of Charitable Gifts – and What to Know Before You Give
Published on by Lynn Meiser, Nick Scerbo, in Not-for-Profit, Tax Services
With the holiday and gift-giving season in full swing, it’s important to keep in mind some key strategies that can help you maximize the tax savings of your generous gift. And while you’re making the most of your charitable contributions, it’s vital to know the organization(s) you’re giving to – including their tax-exempt status and how funds are utilized.
In this post, we’ll unpack the key strategies for maximizing the tax value of your donations, how to check out the organizations you’re planning to contribute to, and what scams to watch out for. First, let’s talk strategy.
Tax savings strategies for charitable donations
Specifically, there are four charitable deduction strategies that can effectively provide tax savings: (1) Charitable Bunching, (2) Donor Advised Fund (DAF), (3) Contribute Appreciated Securities, & (4) Qualified Charitable Distribution (QCD) if the taxpayer is 70 ½ & older.
Charitable Bunching is a strategy that allows a taxpayer to “bunch” charitable contributions in one year instead of spreading them out over a longer period. For example, if a taxpayer usually donates $20,000 a year, the taxpayer will contribute $40,000 in Year 1 and then take the higher Standard Deduction in Year 2 if it increases. This strategy is effective for taxpayers who are on the brink of itemizing or taking the standard deduction each year.
Donor Advised Fund (DAF)
A DAF is a charitable investment fund used solely for the purpose of donating to charitable organizations of the taxpayer’s choice. This strategy allows a taxpayer to contribute personal assets (cash, stock, real estate) to the fund, receive an immediate tax deduction, then later pick the charity the taxpayer would like to donate to.
Contribute Appreciated Securities
In the Contribute Appreciated Securities strategy, the taxpayer may donate appreciated securities (such as stock or property) instead of cash with a low-cost basis directly to a charity. The taxpayer would be able to deduct the fair market value (FMV) of the property at the time of the contribution and neither the charity nor the taxpayer would have to pay tax on the unrealized gains.
Qualified Charitable Distribution (QCD)
The Qualified Charitable Distribution (QCD) strategy is available to taxpayers over 70 ½ years old. This strategy allows a taxpayer to take their IRA distribution and send it directly to the charity. As a result, this strategy would cover the taxpayer’s required minimum distribution (RMD) for the year and make the IRA distribution nontaxable (it decreases the taxpayer’s adjusted gross income and taxable income for the year).
Know before you give – how to check out charitable organizations
Now that you know the strategies for maximizing the tax-saving value of your donation, let’s take a look at some tools and resources for learning more about the charitable organizations you’re considering.
IRS’s Tax-Exempt Organization Search tool
The Internal Revenue Service offers a Tax-Exempt Organization Search tool, which is an excellent resource. Organizations are searchable by legal name or a doing business as the name on file with the IRS, or by Employer Identification Number (EIN). You can also sort the search by state or by city.
Donors can confirm whether an organization is tax-exempt and eligible to receive tax-deductible charitable contributions, and access current and past tax returns for the organization.
State charitable registrations
Donors can also search state charitable registrations – but while this is a great resource where it’s available, not every state has one. Ohio offers one on the Ohio Attorney General’s website, but unfortunately, other states in the region, including Indiana and Kentucky, do not.
Charitable organization watch groups
Fortunately, whether your state offers a state charitable registrations database or not, there are multiple charitable organization watch groups that can help you verify the organization(s) you’re interested in, including:
- Better Business Bureau Wise Giving Alliance
- American Institute of Philanthropy
- Charity Navigator
Be on the lookout for scammers setting up fake organizations
It’s an unfortunate reality that scammers take advantage of tragedy and disaster, such as the COVID-19 pandemic. Scams requesting donations for disaster relief efforts are especially common over the phone.
Taxpayers should always check out a charity before donating, and you shouldn’t feel pressured to donate immediately. A legitimate charity will be happy to get a donation at any time, so there’s no rush. Take your time and do your research.
While nothing takes the place of doing your research, here are some key warning signs that the organization you’re talking to may not be legitimate.
How the donation is paid
Most scammers ask people to pay by giving numbers from a gift card or wiring money. It’s safest to pay by credit card or check only after having done your research. And be suspicious if they insist you donate with cryptocurrency.
Watch out on the web
If you’re donating online, make sure the website page where you enter payment information has “https:” at the beginning of the website address. That means your information is encrypted and transmitted securely. But encryption alone doesn’t mean the site is legit – scammers know how to encrypt, too.
Playing the name game
Watch out for charities with similar-sounding names. Some charitable organizations use names that are very similar to those of respected organizations. You should check with some of the independent organizations that provide information on charities to make sure you’re donating to the correct charity.
Potential donors should ask the fundraiser for the charity’s exact name, website address, and mailing address, so you can confirm it. Some dishonest telemarketers use names that sound like large, well-known charities to confuse people.
Getting better at giving back
These strategies, resources, and watch-outs can help you be a safer, more secure donor with a lower tax burden. If you have questions about utilizing these strategies or have another question about charitable giving, connect with us. Our top tax and non-profit pros can answer your questions and help ensure a better, brighter future for us all.