The COVID-19 pandemic has reminded us of the vast divide between the “haves” and the “have nots.”
Most wealthy people have become richer, while many others are struggling to pay their bills. Caring for children at home due to virtual learning, working from home, or not having a job has taken a huge toll on families. Many in the service industry are exposed to the virus daily.
As we head into February and Valentine’s Day, I suggest we use the entire month to share the love and give generously to those who are less fortunate.
Maya Angelou said it best: “The charitable say in effect, ‘I seem to have more than I need, and you seem to have less than you need. I would like to share my excess with you.’”
Many people already give to their church or synagogue or to a charity. I challenge you this year — if you can afford it — to expand your horizons. Consider giving more or giving to more charities.
When you give, you are not only helping others, but you are helping yourself. Scientists who study neuroscience have shown that when we give to charities, reward centers in our brains are activated. In essence, doing good feels good.
Before you give, make sure you understand the tax consequences of charitable giving, donor-advised funds, and how to evaluate charities you are considering supporting.
Let’s review these issues.
Tax consequences
One of the positive features of the tax law changes enacted in December 2017 was that the amount for standardized deductions increased substantially. The change became effective for the 2018 tax year. For many years prior to 2018, a taxpayer would add up their deductions and if that amount exceeded the standard deduction, they would “itemize” them on their tax return. Currently (for the 2021 tax year), typical itemized deductions include medical expenses (that exceed 7.5% of adjusted gross income), state and local taxes (that are now “capped” at $10,000), home mortgage interest and charitable gifts.
The process changed for the 2018 tax year. For tax year 2017 (prior to the tax law change) a couple filing as “married filing jointly” (MFJ) had a standard deduction of $12,700. After the tax law change, the standard deduction for MFJ in 2018 became $24,000, and, therefore, far fewer people itemized deductions.
For 2021 the standard deduction for MFJ is $25,100 and for 2022 it is $25,900. For tax year 2021, a MFJ couple would need itemized deductions that exceed $25,100 in order to itemize on their tax return. Otherwise, they would simply take the standard deduction. (For persons over 65 and those categorized as “head of household” the standard deductions are slightly different.) Beginning in 2018 far fewer taxpayers itemized, which also meant their charitable gifts were not tax deductible.
An exception was made in 2020 and 2021 when a married couple could deduct up to $600 of charitable gifts, even if they did not itemize on their tax return. The gift had to be in the form of a check and not on used household items or clothing. A single person could deduct up to $300. It is unknown whether this rule will be continued in 2022. (Discuss with your tax preparer the rules for documentation on charitable gifts.)
If you want to take a charitable tax deduction, your donation must be given to a “qualified” charity (the IRS keeps a list of qualified charities). However, if you do not plan on claiming a tax deduction, you can give to anyone. You can help your neighbor or family member who is suffering financially. You can surprise someone in need with a gift of cash “just because.” You can buy them a gift card for groceries or restaurants or pay to have a meal delivered to them.
Also, gifting used household items and clothing is allowed, but tax deductions are only permitted if you itemize on your tax return. Regardless, purging your home of unneeded items is always wise, and someone else may enjoy the items you donate.
Beyond taxes
I had a client who (many years ago) wanted to gift $300,000 to a university in one year. As their financial planner, I researched the tax consequences from such a large gift. Would the full amount be tax deductible over several years? The answer was “no,” based on their income and IRS limitations. I will never forget a conversation I had with their accountant, in which he told me (wisely) that most people who are very generous are not doing it for the tax benefits. He was right. Getting a tax benefit is an added benefit, but not the main reason for being charitable.
Evaluating a charity
As you consider expanding your horizons by giving to more charities, you may want confirmation that the charity is doing good work and not spending inordinate amounts of money on marketing, staff, etc.
I recommend reviewing the charities you are considering supporting on the following websites: Charity Watch, Charity Navigator and BBB Wise Giving Alliance.
Donor-advised funds
These are funds that are advantageous to investors with large taxable accounts. If the taxable account has highly appreciated assets (stocks, exchange traded funds, mutual funds), an asset can be transferred to the donor-advised fund (DAF), and the investor will not owe any taxes on the gain from the appreciation on that asset. It is a win-win: the DAF provides an efficient tax strategy for an investor who is charitable and the charity receives money to further their mission.
DAFs are available through many brokerage firms, and they have varying minimums and administrative fees. A tax document is provided by the brokerage firm to show the amount transferred to the DAF, which determines the amount of the tax deduction. The DAF is not appropriate for persons who want to write multiple $15 checks to charities throughout the year.
In my view, a DAF is best for people who want to donate $5,000 or more each year to multiple charities. The tax deduction is secured at the time the transfer to the DAF is made, and the investor can then notify the administrator of the DAF which charities they would like to support at any time in the future. Once the transfer is made, a completed gift has been made, and that is why the tax deduction happens as soon as the transfer occurs. The investor cannot change their mind.
So many worthy charities
As stated previously, I challenge you to expand your horizons and support more charities than you have in the past. You may be wondering, “Where do I begin?” There are undoubtedly many local charities, national charities, and international charities that are doing valuable work.
You may decide to search for charities that provide services such as local food banks, homeless shelters, or job training. Perhaps you want to consider charities that provide medical care in war-torn or poverty-stricken countries, charities that provide assistance after natural disasters, or charities that help animals or wildlife.
Selecting the charities you decide to support can be a fun and educational project. Include family members in your research. This is a great project for kids or grandkids, and you will be teaching them the importance of helping others.
To find charities in your community, you can search online for “Charities Near Me,” or Charities in New Mexico.” For national and international charities, I suggest you go onto the websites for Charity Watch and Charity Navigator.
Donna Skeels Cygan, CFP, MBA, is author of “The Joy of Financial Security.” She was a fee-only financial planner in Albuquerque for more than 20 years before retiring in 2021. This article was originally posted in the Albuquerque Journal.