If you’ve had a good year and want to give back by supporting a charity, now might be a good time to do so. Donations not only benefits causes and groups of interest to you, but can also benefit you come tax time. Gifts to a qualified charitable organizations can be deducted from your income if you itemize deductions—give $1,000 and you can save $350 on income taxes if you’re in the 35% tax bracket.
That’s not bad… But you can do even better.
How to Effectively Give Back
The market has enjoyed a bull run since 2009. If you invest at all, you probably have appreciated assets from that long run. If so, donating the investment to a charity directly will save you even more come tax season. Make a $1,000 donation in appreciated stock instead of cash and you’ll not only save on income tax, but also in the capital gains tax you would have owed. (And don’t worry about the charity … nonprofits are exempt from federal tax such as capital gains.)
As noted by Charles Schwab, “You can usually deduct the full fair market value of appreciated long-term assets you’ve held for more than one year, such as stocks, bonds or mutual funds.”
President-elect Trump plans to keep the top capital gains tax at 20%, where it is now. But he has proposed cutting the top tax rate from 39.6% to 33%, and said he’d cap writeoffs, including charitable write-offs, at $100,000 for single people and $200,000 for married couples. Trump also wants to get rid of the 3.8% Medicare surtax on net investment income paid by high earners. These changes might, in theory, make charitable giving less attractive, at least for wealthy individuals.
The independent Tax Policy Center estimated charitable giving would fall at least 4.5% in 2017 as a result of tax changes. But others aren’t so sure. “People give for many, many reasons,” noted Marc Pitman, founder of FundraisingCoach.com and The Concord Leadership Group, which advises nonprofits. “What we’ve learned from giving in the wake of the terrorist attacks of 9/11 and then the Great Recession is that even in trying financial times, people still give. Study after study shows that the charitable tax exemption is not the primary reason people give.”
Giving on an Upswing
Pitman noted that the end of the year is traditionally a time of giving. “Many of my clients receive half of their annual budget in the third quarter and over one third of their entire annual budget in December alone,” he said. “This is true in many countries … Deadlines are a big motivation. And the end of the calendar year and is a deadline everyone understands.” He also noted that the season is filled with holidays and religious celebrations that put people in a giving mood.
Katherina Rosqueta, founding executive director of the Center for High Impact Philanthropy at the University of Pennsylvania, said that personal fulfillment and satisfaction is more important than tax benefits in the eyes of donors, but did note that charitable giving has been on the upswing in recent years, which she attributed in part to increased confidence since the end of the Great Recession.
According to The Giving Institute, Americans gave $373 million last year, more than ever before, and that gifts from individuals represent more than 70% of total giving. The organization noted that charitable giving has grown 3.6% annualized between 2010 and 2015, faster than the average GDP growth of 2%.
Schwab Charitable, which provides donor-advised funds and other philanthropic services, indicated that 2016 might continue the trend, partially because the individual retirement account (IRA) charitable rollover was made permanent late in 2015. It allows people aged 70.5 or older to transfer up to $100,000 of their required minimum distribution directly from their IRA to qualified charities without being taxed on the distribution, each year. Schwab Charitable also cited the appreciated assets created by the strong economy and the continued value of charitable tax deductions.
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