The end of the year is upon us, and for many Americans, the holiday season translates into a spirit of giving. According to the Network for Good, which examines data on charitable giving, 31 percent of philanthropic donations happen in the month of December — with about 12 percent of giving taking place in the last three days of the year.
And while generosity is likely linked, in part, to the holidays, the tax year also is coming to a close, which is prescient especially to a certain subset of the population.
“If you’re 72 and have an IRA, you’re subject to something called a required minimum distribution, or RMD, which requires you to take money out of that IRA,” said Brian Lockett, vice president and Certified Financial Planner™ at Comprehensive Wealth Management in Lynnwood. “Well, if you have other sources of income and decide you don’t want to take your RMD, you can actually donate those funds directly from your IRA to a charity. Most importantly, the funds should not be deposited into your bank account first; if given directly to the nonprofit, the donation amount can be deducted from your taxable income.”
The starting age for the RMD used to sit at 70 ½ , Lockett said, until Jan. 1 of this year, at which time it was moved to 72. However, the age for making a donation directly from an IRA to a charity tax-free remains at 70 ½ ; in a country with 77 million Baby Boomers — many of whom are approaching or have already passed that age threshold — this tip pertains to quite a significant number of Americans, and is a contributing reason why the end of the year sees so much giving, according to Lockett. People need to take a certain amount of money out of their IRA(s), realize by the end of the year that they don’t need all of it, and offset their taxes via this method, known as a Qualified Charitable Donation (QCD).
“If you’re at least 70 ½ , you’re often better off to donate directly from your IRA compared to simply writing a personal check, even if you are itemizing,” Lockett said. “You can tell Schwab, Fidelity, or whoever you use as your IRA custodian to cut a check payable to the charity of your choosing, or you can set up a checkbook on your IRA and cut checks directly to the charity (or charities) yourself. The key is you do not deposit those checks in your bank account first. They must go directly from your IRA(s) to the charity(ies). If those checks don’t clear before year’s end, they don’t count as a donation made that year. So, it’s really important not to wait too long. I’d say come Thanksgiving, you need to have your charitable giving plans figured out and start writing your checks — do not wait until Christmas.”
While laws have shifted around RMD and QCD requirements — which may come as a surprise to older Americans — 2020 also has ushered in many other changes to tax law in relation to charitable giving. The COVID-19 pandemic and the resulting CARES Act, the $2.2 trillion economic stimulus bill passed on March 27, made some modifications that are intended to incentivize Americans to give, Lockett said.
“The CARES Act allows people who itemize deductions to deduct up to 100 percent of your adjusted gross income (AGI),” Lockett said, who noted that normally, this deduction is limited to 60 percent of your AGI. Meanwhile, C-corporations can deduct up to 25 percent — up from 10 percent — of their taxable income if used for charitable giving.
And for those of us who don’t itemize our deductions — which can be a time-intensive process that many people skip due to the extra work required — there’s a new “universal deduction” that allows for a charitable deduction of up to $300 per person, thanks to the CARES Act.
These new benefits only pertain to cash donations, Lockett said, meaning that property and other physical assets don’t qualify.
So, in spite of — or perhaps due to — the many upheavals of this year, Lockett said that he’s seen people continue to be generous, with trends even shooting upward with his clients at CWM, in part because their finances have generally fared well in 2020. This small scale and local experience on Lockett’s end mimics the findings of a recent study by Fidelity Charitable, which found that 54 percent of individual donors plan to maintain their giving levels, while 25 percent plan to increase their donations this year.
If you’re planning on jumping on the bandwagon and making donations before the end of the year, Lockett provided some tips on how to best choose an organization to give to.
“Let’s say you want to support animal welfare, but there’s so many animal welfare organizations out there,” he said. “Start off with online tools like Charity Navigator, Charity Watch, GiveWell, or GuideStar, which will provide you a ‘score’ to help guide your decision.”
Based on info provided by one of these tools, Lockett suggested looking for the following when selecting a charity to give to: That the program ratio — the program expenses divided by total expenses — should be greater than 75 percent; the net assets should not be greater than three to six times the total expenses; and the contribution revenue divided by fundraising expenses does not exceed 25 percent.
“Not all nonprofits are created equal,” Lockett said. “So, it’s important to do your homework.”