Advice and the Advisor

Avoid year-end rush: Vet charities to donate to now

Jennifer Woods, special to CNBC.com
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The end of the year is often a scramble to make last-minute charitable gifts in an effort to boost annual tax deductions.

To that point, 17.5 percent of donations are made in December, significantly more than any other month. And for those who make online donations, it's even more concentrated, with 29 percent made in December — 11 percent in the last three days of the year alone.

While this trend is unlikely to change anytime soon, financial advisors say having a plan to determine your giving throughout the year could help avoid a lot of headaches at year-end. It can also ensure you are maximizing the impact of your donations and ending up with the deductions you're counting on.

If you want to make sure your donation is tax deductible, check if the organization is legitimate and is qualified to accept deductible contributions. These steps will make sure you have not donated to phony charities.

If you're considering giving to an organization that you're not very familiar with, it's important to do some due diligence before making a gift. This includes checking to see whether the organizations fall under Internal Revenue Service section 501(c)(3), which means it is qualified to receive tax-deductible donations.

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Juan Ros, a certified financial planner with Lamia Financial Group, said you can check on a charity's tax-exempt status in IRS Publication 78. "There are also several charity 'watchdog' websites that rate or grade organizations," he added, such as Charity Navigator and BBB Wise Giving Alliance.

GuideStar also provides information on thousands of nonprofits, including their 990 tax filings, which have information about each charity's mission and overhead costs. If you still have questions, experts say to call the charity directly, as most such organizations — if legitimate — will embrace the chance to speak with potential new donors.

You also need to consider how many charities to give to. Eileen Heisman, president and chief executive at National Philanthropic Trust, said giving to fewer causes is actually better, particularly when you're dealing with large sums of money.

You'll also have a greater impact by sticking with the same charities for a longer period of time, she said, adding, when donors are predictable — making repeat gifts of a similar amount each year for an extended period of time — it's easier for charities to plan their fundraising and fulfill their mission.

Figure out funding

Most people make monetary donations by either check or credit card; however, to maximize your gift, Heisman suggests the former.

When you pay online, she said, there are transaction and credit card fees the charity has to pay (sometimes as much as 5 percent), so the charity doesn't get the full amount. If you do write a check, make sure it arrives before Dec. 31 in order to get the deduction for that year.

If you have appreciated securities in your investment portfolio, advisors say donating those in lieu of cash is often an even better move.

Charitable giving and capital gains
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Charitable giving and capital gains

According to Eric Freckman, CFP and owner of advisory firm Guillaume & Freckman, giving appreciated stocks yields benefits for both donor and charity.

"[The donor] will get a deduction for the full amount, and the charity does not pay any capital gains tax," he said. "[It's] much better than giving cash or selling stock, paying taxes and then gifting cash."

Just make sure the charity you're gifting to has a brokerage account to receive the stock and that the trade is executed before year-end to claim the deduction for the same year.

Consider a donor-advised fund

For larger donations, many advisors recommend using donor-advised funds. With DAFs, "clients can open an account, donate appreciated stock or other assets, and get the tax deduction for the entire amount contributed," said Danielle Howard, CFP and owner of Wealth By Design. Once the DAF is funded, the donor can advise the fund how contributions are to be distributed, she added.

DAFs also simplify the due diligence and record-keeping processes. "The fund confirms the 501(c)(3) status of the organization and can send a check either in the name of the donor or anonymously," Howard said, adding that donors "can choose as many organizations as they want and the DAF keeps track of all giving done.

"The client has one record to give to their accountant."

The amount you can deduct in any year may be limited to 30 percent to 50 percent of your AGI, depending on the type of charity you've chosen to support.
Nathan Zielonka
principal of Zielonka Financial Services

Keep records

If you're not using a DAF or service that tracks your donations, experts say be sure to keep all of the letters you receive from charities after making a gift. This will help you determine how much you've given throughout the year, and if you ever get audited, you'll need it as proof of your gift.

If you've gotten anything of value in return for your donation — such as seats at a charity gala or an auction item — you can only deduct what you paid above the item's value. The charity should also give you a letter explaining the deductible amount, which you need to keep for your taxes.

It's also a good idea to hold on to a copy of your canceled check, online receipt, bank statement or any other document that shows proof of your donation.

Understand your deductions

While a financial advisor can help you put together a giving plan and assist with setting up a DAF or transferring assets, it's always a good idea to speak with a tax expert before making donations, specifically larger ones, as they can help maximize your deductions.

For instance, "the amount you can deduct in any year may be limited to 30 percent to 50 percent of your AGI [adjusted gross income], depending on the type of charity you've chosen to support, with the rest carried over into the future," said Nathan Zielonka, a CFP and principal of Zielonka Financial Services.

He added that some states, such as Massachusetts, also give credits for donations to certain types of charities. These are things you should determine ahead of time with a tax expert.

While you should support a charity because you believe in its mission, consulting experts before making gifts can help you create a plan that allows you to give more effectively and tax efficiently.

— By Jennifer Woods, special to CNBC.com