Charitable giving reached an all-time high of $390.05 billion last year, according to Giving USA 2017: The Annual Report on Philanthropy for the Year 2016. The rise was spurred largely by individual giving and 2017 is likely to break last year’s record.
Considering that many make charitable gifts at year-end, it’s amazing how little thought and research can go into the process. As you rush to complete your donations, be aware that IRS Commissioner John Koskinen has said “Fake charities set up by scam artists to steal your money or personal information are a recurring problem.” To help avoid a costly mistake, here is a four-step checklist for your giving.
Step 1: Confirm that the charity is legitimate. One of the simplest scams involves using a name that seems similar to a nationally known organization’s. To help taxpayers research, the IRS has established an online search tool, Exempt Organizations Select Check (https://www.irs.gov/charities-non-profits/exempt-organizations-select-check) (EO Select Check), which allows users to search for an exempt organization and check information about federal tax status and filings.
Remember, there’s a big difference between “tax exempt” and “tax deductible.” Tax exempt means the organization doesn’t have to pay taxes. Tax deductible means you can deduct your contribution on your federal income tax return. EO Select Check allows you to find legitimate, qualified charities to which donations may be tax-deductible. Legitimate charities will provide their Employer Identification Numbers (EIN), if requested. The IRS notes that it is advisable to double check a charity’s legitimacy using an EIN.
Step 2: Research the charity’s financial health. Once you have confirmed the group is legitimate, you can see what others say about the organization by going to the Better Business Bureau’s (BBB) Wise Giving Alliance, Charity Watch and GuideStar. You will also want to know that its finances are healthy and that it is efficient, ethical and effective. Charity Navigator provides 0 to 4-star rating system, which includes a review of each charity’s fiscal performance. The site also helps you understand what portion of your donation goes to overhead, versus the cause itself.
Step 3: Determine how you will donate to the charity. You should NEVER send cash donations or wire money to someone claiming to be a charity. And do not provide any personal or financial information until you’ve thoroughly researched the charity.
- Check/credit card: If you plan to send a check, your payments must be postmarked by midnight Dec. 31st – just writing “Dec. 31” on the check does not automatically qualify you for a deduction. Pledges aren’t deductible until paid, though you can count them in 2018 if you meet the postmark date. Donations made with a credit card are deductible as of the date the account is charged, so if you are a little late in the process, you probably should stick to credit cards.
- Appreciated securities: Making a gift of appreciated securities from a taxable investment account allows you to write off the current market value (not just what you paid) and escape taxes on the accumulated gains. You will need to get information about how to send the assets, and be sure to confirm all receiving account numbers before you hit the “submit” button.
- QCD: If you are using a Qualified Charitable Distribution (QCD), which allows you to sidestep the taxation on your Required Minimum Distribution (RMD) of your retirement account, be sure to follow the IRD rule carefully. You can make a QCD of up to $100,000 directly from your IRA to a public charity (not to a private foundation, nor to a charitable supporting organization or a donor-advised fund) without including the distribution in your taxable income. If you use it, you swap having to claim the income on the RMD for deducting the charitable contribution.
Step 4: Keep good records. For any cash or property valued at $250 or more, you must have a receipt (bank record, payroll deduction or written communication) identifying the organization, the date and amount of the contribution and a description of the property. For text message donations, flag the telephone bill with the name of the receiving organization, the date of the contribution, and the amount given.
A CERTIFIED FINANCIAL PLANNER™ professional can help you design a financial plan that makes the most of annual charitable donations.