Maximizing the impact of charitable contributions

With the recent tornado in Oklahoma we are reminded of the importance of charitable giving.  In fact, since the tornado, over $15 million has been donated to the American Red Cross. According to the Giving USA Foundation, individuals gave over $217 billion dollars to charitable causes in 2011, a 3.9% increase over 2010. As charitable giving increases, I want to make sure you know not only how to maximize your charitable contributions from a tax standpoint (see my post about using the donor advised fund), but also that you are informed about the effectiveness of the charities you choose.

There are a couple resources available now to help understand how effective a charity is with the money you donate. Charity Navigator has been around since 2001 and now assesses over 6,000 charities. Its goal is to provide one overall rating based on two areas of effectiveness: 1) their financial health and 2) their transparency and accountability. For example, the American Red Cross, a popular one at this moment, shows a total score at 59.64 out of 70 as of fiscal year end in June of 2011.

Another website, CharityWatch.org, also rates different charities’ effectiveness. While they rate only 600 or so of the largest charities, they tend to dig much deeper into the inner workings of the organization than Charity Navigator. They study the individual finances of every charity to give a clear picture on what the money is actually being used for. Instead of taking the information at given at face value, they try to determine if the donors’ objectives are actually being met. Because their analysis is more in-depth, Charity Watch charges $50/year for access to their Charity Rating Guide, which provides financial data and a rating from “A+” to “F” for each charity.

We all want to make sure the money we give generously is used effectively. Whether you’re giving funds to aid with large natural disasters or donating to your local food bank, donations are needed and greatly appreciated. Now, in addition to maximizing the tax effectiveness of your charitable donations through donor advised funds, these tools can help you choose organizations that will help your dollar have maximum impact.

Charitable IRA distributions renewed for 2013

We have great news for people making charitable gifts this year! Thanks to the American Taxpayer Relief Act of 2012 (ATRA), IRA owners can once again make a qualified charitable distribution (QCD) from an IRA to a qualified charity of their choice.

For those who are charitably inclined, a QCD can really maximize the effectiveness of charitable gifts.

Here’s how it works:

For this year, IRA owners who are 70 ½ or older and would otherwise have to satisfy a required minimum distribution from an IRA may donate any portion up to $100,000 of the required distribution directly to a qualified charity(ies). Additionally, the IRA owner can exclude the amount of the QCD from his or her gross income on their 2013 tax return. The amount of the QCD excluded from the gross income is not included when determining any deductions made to qualified charitable organizations.

As with many IRS provisions there are a number of fine print items to keep in mind.

  • You are only eligible to make a QCD if you are 70-½ or older.
  • Contributions can only be made to 501(c)(3) charities and 170(b)(1)(A) organizations.
  • Donor advised funds and 30% public foundations are not eligible to receive the QCDs.
  • The QCD must be made directly from your IRA to the desired charity, meaning that the check issued from your IRA must be payable to the charity. If the check is made payable to you, then it counts as taxable income and will be considered a normal IRA distribution.
  • The QCD can be made from any IRA. SEP and SIMPLE IRAs are only eligible if they are not receiving employer contributions in the same year as the QCD is made. You cannot make the QCD from any employer retirement plans, such as a 401(k), 457 or 403(b), etc.
  • The QCD cannot be a split-interest gift, meaning that 100% of the gift must go to a single charity and the gift cannot be shared with the donor or any other designee of the donor. The donor cannot receive any economic benefit as part of the gift.

At this time, the QCD provision is only extended through the end of 2013. We do not know if the provision will be renewed in years beyond. If you are interested in making a donation directly from your IRA to a charity, reach out to your advisor to get started and make 2013 a year of giving!

Charitable giving: Donor-Advised Funds

If you are like me, then you receive lots of invitations to donate to your favorite charities. There are natural disaster funds, religious contributions, education, health, and many other non-profit groups that look to individuals for funding. According to the Giving USA Foundation, individuals gave an estimated $211.77 billion in 2010, a 2.7% increase from 2009. Since this is an important topic to many people, it is good to be informed on the most effective ways to give to your favorite charities.

One common way to contribute to charities is to give cash. This is simple, and charities can easily handle the different contribution levels. The downside is that you may have to sell an asset (stock, bond, mutual fund) in order to free up the cash you intend to donate. Usually, when you sell something, there are tax consequences to doing so. For example, if you had a stock worth $10,000 and the basis was $5,000, you would create a tax consequence by selling and would likely have less than the full $10,000 to give to the charity. (more…)

RMDs and Charitable contributions

If you have IRA accounts and are over age 70 ½, then you probably know about the Required Minimum Distribution (RMD) rules. These IRS rules require you to take money out of your retirement accounts each year, whether you need the money or not.

This money could be spent or re-invested back into a taxable investment account to allow it to continue to grow. Some people deposit this money to their checking account, and eventually use it to make a charitable contribution to the charity of their choice.

Fortunately, the government recently extended a provision through 2011, which allows individuals over age 70 ½ to exclude up to $100,000 from their gross income if it is paid directly from an IRA to a qualified charity. In addition, that excluded amount can be used to satisfy the RMD for the year.

This could potentially be a much more tax-efficient way to make charitable contributions than by depositing the RMD amount in your bank account and then writing a check for charity. If you’re a Merriman client, we can help you complete the paperwork accordingly, just give us a call.

To find out more information on this valuable topic, please discuss with your CPA or read this article from the IRS.