The holiday season is a time of generosity and community. In the financial world, year-end is also the time to make decisions that will affect next year’s tax filings. At the intersection of these is strategic charitable giving – a way to thoughtfully and intentionally make a difference for the causes and organizations that are important to you.
Like any aspect of financial planning, thinking strategically allows us to maximize the value of charitable giving for the benefit of both the recipient and the supporter.
To maximize the impact of your philanthropy, focus on three key issues:
– The tax rules and implications of charitable donations
– Donating your IRA’s Required Minimum Distribution (RMD)
– Analyzing and identifying well-run charities
Giving properly under tax code
In 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing taxes jointly.
Before you consider charitable giving as a tax strategy, check with your tax professional to ensure it makes sense for you to itemize your charitable donations on your taxes.
As in previous years, you are able to deduct up to 60% of your adjusted gross income (AGI). If you choose to give more, you can carry the excess forward for up to five years.
It’s great to be 73: Donating your RMD
For those fortunate individuals who have celebrated at least 73 trips around the sun and have an Individual Retirement Account (IRA), there’s an option to gain the tax benefits of charitable giving without having to itemize.
Once you turn 73 years old, you are required to take out a portion of your IRA’s prior year-end balance – a Required Minimum Distribution (RMD) – as taxable income. However, through a Qualified Charitable Donation (QCD), you can give all or a portion of your RMD directly to a qualifying charity, and not pay any income taxes on the funds donated.
If you opt for a QCD, keep a few things in mind:
– You must request that your IRA custodian send your contribution directly to the charity; the funds cannot come to you first.
– Your IRA custodian will send you a form 1099(R) noting that all money distributed from your IRA is taxable. It will be up to you and your tax professional to identify QCD funds as non-taxable on line 15B of your form 1040.
– Finally, if you’re feeling extra generous and it fits with your financial plan, it is possible to donate more than your RMD as a QCD, up to $100,000, non-taxable.
Choosing the right charity
When selecting recipients for your charitable giving, it’s important to gauge a nonprofit’s financial and operational health. Here are steps to keep in mind:
First, visit one of several online tools that compile the financial data all charities are required to report under IRS Form 990, such as Charity Navigator, Charity Watch, Give.org, GiveWell, and Guidestar.
Search for an organization and look at key metrics:
– Program ratio: To help ensure the bulk of your donation will go to support the organization’s mission or program – and not overhead expenses – pay attention to the program ratio, which is program expenses divided by total expenses.
– Overhead ratio: Non-program expenses divided by total expenses, or the inverse of the program ratio. Ideally, this will be 25 percent or less.
– Asset ratio: Net assets divided by total expenditures. If the organization’s net assets are greater than three to six times total expenses, it may signal that they are using assets inefficiently. In other words, they are sitting on excess money rather than using it for the stated mission.
– Cost-to-raise-funds ratio: Contribution revenue divided by fundraising expenses, which ideally is less than 25 percent.
Of course, there are exceptions to these rules. Operations and programs that require high-value assets will adversely affect a charity’s asset ratio. For example, a charity that provides equine therapy to individuals with disabilities may have higher overhead – land, barn, horses, veterinary bills, equipment and more – than that of a small volunteer-run food bank. However, these benchmarks provide a solid starting point to compare and prioritize nonprofits.
If you have more questions or need a sounding board for charitable giving and other financial strategies, please contact us.
*Comprehensive Wealth Management, LLC does not offer tax or legal advice. Please consult your CPA or attorney for specific tax and legal questions.
Comprehensive Wealth Management
3500 188th St. S.W., Suite 102
Lynnwood, WA 98037
Phone: 425-778-6160
800-268-2440
Email: info@cwmnw.com
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