photo courtesy Universitat Pompeu Fabra (Pompeu Fabra University, Barcelona, Spain)
The turkey leftovers are gone, and any Black Friday or Cyber Monday deals have been snatched up. Now, as you wait for your online purchases to arrive, it’s time to consider which charity you want to support on this Giving Tuesday.
Let me suggest that, when it comes to charitable giving, you should consider not only who, but how.
If you are not already familiar with Giving Tuesday, the idea is simple. After the commercialism of the days following Thanksgiving, participants are encouraged to engage in charitable giving or other acts of generosity. New York’s 92nd Street Y and the United Nations Foundation partnered to promote Giving Tuesday for the first time in 2012; in 2019 the effort has spun off into its own organization (styled GivingTuesday). The GivingTuesday organization reports that participants collectively donated more than $400 million in 2018. Many organizations, including Facebook, set up donation matching or other incentives for the holiday.
Here in my hometown of Austin, Texas, local organizations have geared up to encourage residents to give back. The central Texas organization I Live Here I Give Here suggests that participants may want to go beyond donations to hold clothing drives, foster a pet, or even just spread the word on social media. Among the many local organizations the organization boosts are Art From The Streets and Caritas of Austin, which I have written about in this space previously.
Just as Black Friday should not represent the only time you think about your spending, Giving Tuesday should not be the only time you think about charitable giving. But the occasion serves as a useful reminder not only to give, but to give thoughtfully. Retirement account holders beyond retirement age have a special opportunity to do just that – and potentially do themselves some good at the same time.
Many retirement accounts, including traditional 401(k) plans, individual retirement accounts and others, offer savers a tax benefit upfront. But eventually the tax procrastination party must come to an end. With limited exceptions, the Internal Revenue Service requires you to begin withdrawing from your qualified retirement account by April 1 of the year after you turn 70 1/2. A lifetime of savings and deferring taxes abruptly turns into an annual requirement to withdraw assets, to incur taxable income, and likely to pay taxes.
Every dollar you withdraw from a pretax retirement account can incur up to 37% of federal taxation and up to 13% of local taxation if you happen to live in a high cost location like California or New York. (First tax planning tip: Move to Texas or another state without an income tax). Not only do you pay tax on your IRA withdrawals, but the distributions can limit your available deductions. If you’re not already in a high tax bracket, IRA distributions can cause more of your Social Security benefits to be treated as taxable and can increase your Medicare Part D premium costs.
This brings me back to Giving Tuesday. If you are charitably inclined, there is no reason you need to take your required minimum distribution to your personal account if you don’t need that income. Instead, you can use a qualified charitable distribution to distribute up to $100,000 of the RMD to a charity of your choice.
Unlike donating cash, donating a portion of your RMD does not make you eligible for a deduction on your federal tax return. The benefit is even better; you no longer have to report the distribution as taxable income in the first place. Following the 2017 Tax Cuts and Jobs Act, fewer Americans benefit from itemizing their deductions. The benefits of donating a portion of your RMD, however, do not rely on itemization.
One downside to qualified charitable distributions from IRAs is that they must go to an operating charity. This means you cannot distribute the assets to a donor advised fund, private foundation or certain charitable trusts. If you are not sure if your intended recipient qualifies, you can check a directory like GuideStar or Charity Navigator – or just ask the organization directly.
Tax benefits should not be the only reason you give to charity. But if you are already charitably inclined, favorable tax treatment allows you to give even more to the causes you support.
For many people, charitable giving is not confined to one Tuesday a year. Americans gave a collective $428 billion to charity in 2018, according to a report from Giving USA, with 68% of gifts coming from individual donors. A comprehensive charitable giving strategy should be tailored to your individual situation. Beyond donating retirement account distributions, many people find it useful to donate appreciated securities, give to a donor advised fund, fund a trust, set up a charitable gift annuity or start a foundation. None of these approaches are right for everyone. But being aware of the many ways to give can help you to identify the right strategy for you.
However you give, have a happy Giving Tuesday.