The Greater Good

Lori Booth-Houle CPA, CFP®

Apr 8, 2022

As long-term investors, one of the things we know to be true is that there’s always something going on in the world to worry about, and yet—despite sometimes extreme bouts of volatility–markets ultimately climb over that “wall of worry” and rise over time. 

In a charitable context, the fact that there’s always something going on in the world to worry about means that there is always someone, some place, or some cause that needs our help.  Disasters and crises of any sort galvanize charitable giving; that is certainly the case now as the Russian invasion of Ukraine has caused harrowing conditions for civilians, millions of whom have been displaced within their own country or have been forced to seek safety in neighboring countries.  And although the crisis in Ukraine is currently top-of-mind for many, you may have an interest in other charitable causes that are not as well-publicized. 

The best practices for charitable giving are really the same regardless of the disaster or crisis at hand:  Determine what type of asset (i.e. cash, tangible goods, investments, human capital) is the right one to give; make sure it’s going to the right organization that will use your gift effectively; consider the timing of your donation; and understand the tax benefits of your charitable gift.

Give The Right Type of Asset

Determining what type of charitable gift will help the most is an important first step, because different crisis responses may require different resources.  In the case of a local disaster, you may find that donations of food, bottled water, or other tangible items are requested by the charities in the area who are assisting with the relief response.  If you own appreciated non-cash assets (such as investment positions) or tangible personal property of some value, you may want to gift those assets.  You might have professional skills and strengths or a network of connections that could be of assistance in a disaster, so you may want to donate your human capital.  Of course, cash works in almost any situation, and certainly in the case of far-flung humanitarian crises such as in Ukraine, cash is typically the most effective asset to donate, because it allows charitable organizations a high level of global flexibility in deploying the funds to the areas of greatest need.  Giving the right type of assets also ties in closely with the tax benefits of giving, so be sure to read on to the section titled “Understand the Tax Benefits of Your Gift,” below.

Give to the Right Organization (and Don’t Get Scammed)

 The “right” organization is one that is well-established, reputable, transparent, meets a vital need, is effective in serving that need, and has values congruent with your own.  Your charitable giving plan should consider these qualities, and you may also need to do a little online homework to check the ratings of the organization’s finances and programs.  There are several online charity “watchdog” and ratings websites that are credible and well-known, including Charity Navigator, Give Well, CharityWatch, and the Better Business Bureau Wise Giving Alliance

During periods of disaster, social media and news outlets offer abundant information on charitable giving and where to give.  Just as abundant, unfortunately, are scam operators ready to prey on unsuspecting donors.  Make sure you exercise your critical thinking and be skeptical of outreach from charitable organizations you aren’t familiar with, until you’ve done your research and are satisfied that the organization you plan to give to is legitimate.

With specific regard to the ongoing crisis in Ukraine, many credible and well-vetted organizations have published charitable giving tips and lists of highly-rated charities involved in the humanitarian relief and recovery efforts on their websites.  If you’re not sure where to start, try reading these: 

Consider the Timing of Your Gift

According to the Federal Emergency Management Agency (FEMA), emergency managers think of disasters as recurring events with four phases:

  • Mitigation: This phase includes actions taken to minimize the effects of disaster.
  • Preparedness: This phase entails planning the responses for events that cannot be mitigated.
  • Response: The response phase occurs in the immediate aftermath of a disaster, when business and other operations do not function normally.
  • Recovery: During the recovery period, restoration efforts focus on returning the community to normal operations and activities.  This phase can be quite prolonged, depending on the extent of the disaster or crisis.

Considering the timing of your gift in the context of these various phases may help you align your purpose and priorities for giving with the greatest need for resources.  For example, in many cases, donation dollars flood in during the response phase at the onset of a disaster, but decline in the longer-term recovery phase, when resources are still desperately needed to alleviate suffering and bring lives back to normal.  You may decide you want to support both a disaster response and what could be a prolonged recovery period, so in that case you could spread your donation over different time periods as the phases of the disaster evolve.

In another context, the timing of your gift can be impactful because of the tax benefits related to charitable giving, so as you plan to give, be sure you…

Understand the Tax Benefits of Your Gift

Maximizing your tax benefits from charitable gifts may be relatively straightforward if you itemize your deductions, depending on the size and nature of your gifts.  However, the bar for itemizing has been set considerably higher since the 2017 Tax Cuts and Jobs Act raised the standard deduction.  For 2022 tax returns, the standard deduction is $12,950 for single filers, and $25,900 for married couples filing jointly, so in order to itemize, your eligible deductions must exceed those amounts.    

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended certain tax benefits related to charitable giving, but only through 2021.  Under this legislation, individual taxpayers who do not itemize on their 2021 tax returns may be able to deduct up to $300 of cash contributions ($600 if Married Filing Jointly).  Also under this legislation, the adjusted gross income (AGI) limits on charitable deductions for taxpayers who do itemize was expanded for the 2021 tax year. Note that the rules, even before this Covid legislation was passed, allowed that if you’re able to itemize and you exceed the annual charitable deduction limits, you can carry over the excess charitable deduction for up to five years.

Unfortunately, there is quite a bit of uncertainty about exactly how charitable deduction limits will evolve for 2022, unless Congress extends the 2020 tax benefits again.  This article from Charity Navigator about the rules for 2021 charitable deductions will give you a basic primer for the 2021 tax return you’re filing right now.  As you’re considering your charitable giving for 2022 and beyond, be sure to talk with your tax preparer and TCI advisor to devise an effective plan that fits your tax circumstances. 

Some basic strategies are always worth considering, regardless of whether Covid legislation is extended.  One is the donation of appreciated non-cash assets such as investments, which can serve to eliminate the capital gains tax you would have otherwise paid if you had sold the asset first and then donated the proceeds.

Another smart strategy for charitable giving is to make a Qualified Charitable Distribution (QCD) out of your Individual Retirement Account (IRA) assets.  This option is available to individuals aged 70-1/2 and older, and the limit on QCDs is $100,000 per year.  QCDs are essentially tax-free withdrawals of IRA assets which would otherwise have been taxed to you at ordinary income tax rates.  Donations made as QCDs cannot also be used as an itemized deduction, so they’re a great strategy if you’re taking the standard deduction.  Even if you’re already itemizing, QCDs can still be helpful in reducing your adjusted gross income, which in turn may help with certain phaseouts and in reducing your future Medicare premiums, which are based on income.

If you typically can’t itemize, you might consider a strategy called “bunching,” in which you bunch two years’ worth of charitable donations into 2022, for example, so that you will itemize deductions on your 2022 tax return, and then take the standard deduction in 2023.  Depending on the amounts involved, you may even find that this strategy results in a larger two-year deduction than two separate years of itemized deductions, given that the standard deduction amounts are so high. 

Donor-Advised Funds

A bunching strategy and/or donating appreciated investments can work very well not only for individual donations but also if you’re funding a donor-advised fund.  A donor-advised fund is a charitable account which allows donors to deposit assets, receive an immediate tax deduction for their value, and then make recommendations regarding where and how much to donate to any IRS-qualified public charity.  A sponsoring organization (such as the community foundations which serve the areas where TCI’s offices are located–Arizona Community Foundation, Community Foundation for Southern Arizona, The Denver Foundation, or Community Foundation for Northern Nevada) manages the account, and while the donor can often recommend how to invest the assets, it’s important to note that the sponsoring organization has legal control over them once they’re in the account.  The immediate tax deduction, the tax-free appreciation of assets donated to the fund, the ability to donate anonymously if you wish, and the control over where and how much to donate make donor-advised funds very popular for taxpayers with plans for significant charitable giving. 

There are additional, more complex charitable giving techniques as well, such as charitable remainder trusts, charitable lead trusts, private foundations, etc.  These are typically more relevant when gifting larger amounts and call for a conversation with your estate attorney, in addition to your TCI advisor and tax preparer. These are troubled times for many.  If you have charitable intent and need help crafting a plan, the guidelines above and a conversation with your TCI advisor can help you get started.  Despite the uncertainties in the world, we know that human generosity has always been, and will continue to be, a major factor in the recovery from any crisis.

The author of this blog has retired from TCI and no longer provides investment or financial planning services. Hopefully, they are making the most out of this chapter in their life by immersing themselves in what gives them purpose and fulfillment.

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