Charitable Giving: There’s a strategy to writing that check

For many of us, supporting nonprofit organizations brings satisfaction, fulfillment and a connection to causes that are important to us. Donating to a registered 501(c)(3) nonprofit may also help reduce our taxable income.

No matter our motivation, it may seem easy to write a check. But like any aspect of financial planning, thinking strategically allows us to maximize the value of charitable giving to benefit both the recipient and the supporter.

CWM recommends focusing on three strategic issues:

• The tax rules and implications of giving cash to charity
• Donating your IRA’s Required Minimum Distribution (RMD)
• Analyzing and identifying well-run charities

Giving properly under tax code

As of 2023, the standard deduction is now $13,850 for single filers and $27,700 for married couples filing taxes jointly, plus an additional $1,500 if the taxpayer is blind or over 65.

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 percent 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 the financial plan we’ve built, it is possible to donate more than your RMD as a QCD, up to $100,000, non-taxable.

“Here’s a charity I’m considering – can you check them out for me?”

This is one of our favorite questions from clients. We know how important it is to ensure charities are using your donated funds wisely to maximize outcomes for those they serve.

While the CWM team is always happy to review nonprofit candidates for you, there are also steps you can take to gauge a charity’s financial and operational health.

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: Program expenses divided by total expenses, which should be greater than 75 percent.
• 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. We’re always happy to help at Comprehensive Wealth Management.