Your Money: Charitable giving helps in at least two ways

In 2018, the United States crossed a notable milestone: The share of U.S. households reporting donating to nonprofit organizations fell to 49.6% — dropping below 50% for the first time, according to the Philanthropy Panel Study. In 2000, 66.6% of Americans reported charitable donations.

While the average donation amount across all Americans has fallen over the past two decades, the increase in the percentage of households who do donate are actually are giving more (the “dollars up, donors down” effect).

In 1960, 9.8% of all donors gave half of all donations; by 2012, half of total giving came from 1.8% of potential donors. This trend of fewer donors giving much more money is also coming with a falloff in volunteerism. It seems people who don’t volunteer to work with a charity are also far less likely to give money to it. Volunteerism has been in decline for the past few decades and is amplified for people at lower income levels.

However, charitable giving delivers two big benefits to benefactors: it can help transfer wealth efficiently, and it can solidify a commitment to social responsibility.

Possible reasons for donor decline (both in money and time)

Many studies show a correlation between the Great Recession and donor decline, although the trend varies a lot by region and socio-economic group. Others point to declining religious affiliation and participation, as more Americans choose not to identify with organized religion, and a general social disconnection brought on by the pandemic. It’s also possible that charitable giving has fallen off as a result of the civic-minded “Greatest Generation” gradually passing away.

And then there’s tax policy: The Tax Cuts and Jobs Act of 2017 (TCJA), by increasing the standard deduction, actually decreased incentives for making charitable contributions. Nearly 70% of upper-income households who claimed charitable deductions before TCJA dropped to 29% afterwards.

Why does charitable giving matter?

Think about the institutions, organizations, networks and associations you care most about, and how they help make communities and our world more decent, humane, healthier and more beautiful. Hospitals and health clinics, museums, colleges and universities, symphonies, theaters, animal shelters, PTAs and public libraries are just some of the institutions that rely on charitable donations to support their missions.

In addition, the tradition of generosity in the U.S. has given us a deep sense of meaning and mutual support for centuries. It fills a gap that the U.S. government was neither designed nor equipped to fill.

Finally, charitable or philanthropic giving allows wealthy families to establish a legacy while also meeting strategic tax planning objectives. Whether you have a net worth of $1 million or $100 million, you should consider charitable giving as a cornerstone of your family’s financial plan. Using trusts can expand options for supporting a favorite charity through legacy as well as provide a tax-favored income stream for you and your heirs. However, trusts can be complicated to set up and administer, so you should consider working with a tax professional, qualified financial adviser or estate attorney in those cases.

Two relatively simple charitable giving options

• Donor Advised Fund: If you want to give to charity during your lifetime, a Donor Advised Fund (DAF) could be a good option.

A DAF allows you to donate a large amount now, taking the charitable deduction, but spread out the gifts over time. It’s relatively simple to set up, with low initial setup and annual administration costs. The initial funding of a DAF account is modest, usually $5,000, and you are not required to make any annual distributions. A DAF allows you to give to any charity recognized by the IRS, usually a 501(c)(3) tax-exempt organization. There are no excise taxes, and gifts can be made anonymously. Importantly, for cash donations or donations of publicly traded securities, you’re generally eligible for an income tax deduction of up to 60% of your adjusted gross income, or AGI. For non-publicly traded assets or securities, you’re allowed a charitable deduction of fair market value up to 30% of AGI.

• Qualified Charitable Distributions of your RMD: A provision in the Internal Revenue Code allows people in their 70s and older to transfer funds directly from an IRA to a charity without any adverse tax consequences through what is called a Qualified Charitable Distribution (QCD). A QCD is an easy way to meet Required Minimum Distribution obligations if you are at least 73 at the time of transfer. Under the provisions of a QCD, up to $100,000 ($200,000 married couples) per year can roll directly from each qualified taxpayer’s IRA to the charity, so long as it never touches your hands.

Certain rules and restrictions apply to QCDs. For example, you need a custodian to handle the distributions, and you can’t claim a deduction if you itemize your deductions. Not all charities can accept QCDs, such as DAFs or private foundations. Although you can use Roth IRAs for QCDs, there’s no tax advantage because Roths are designed to provide tax-free income in the future.

On the other hand, a transfer isn’t treated as a taxable distribution subject to federal income tax — so it may allow you to effectively lower your income for Social Security purposes. And new rules under the 2022 SECURE 2.0 federal retirement act improve the advantages of QCDs in two ways. First, annual rollover limits are indexed to inflation beginning in 2024 — so you and your spouse may be able to contribute more in the future to your favorite charity. Secondly, you can include in your QCD a one-time gift of up to $50,000 to a split-interest entity such as a charitable remainder trust (CRT) or charitable gift annuity (CGA) (these amounts will be indexed to inflation as well).

Integrating charitable giving into your overall wealth plan requires careful consideration. Working with estate planning professionals and financial advisers can be really helpful when devising a charitable giving strategy that works seamlessly with your wealth plan while contributing to the public good.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on WCCO 830 AM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com. Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.