Avoiding “Tracking-Error Regret”
Written by Andrew Hunt
Written by Jason Hiley
Jane smiled as she read the note from a recent graduate -a recipient of the scholarship fund she and her husband Bill had begun shortly after retirement. Passionate about education, the couple began giving annually years ago to their alma mater, the place where they first met as young teachers’ assistants.
Education is their lifelong passion. At the core of their belief system is a desire for all children to have access to higher education, regardless of financial circumstances. Thanks to some careful estate planning, Bill and Jane knew that the scholarship fund would continue beyond their lifetimes leaving a legacy of which they could be proud.
Bill and Jane are not unique; many of us hold philanthropic causes close to our hearts that we wish to further. However, many of us are reactive rather than proactive in our philanthropic pursuits; we dedicate our charitable resources to support charities of others rather than those about which we care most deeply.
In order to become a more proactive philanthropist, you will need to do some reflection and spend some time planning your course of action.
Identify Your Passion and Select a Charity
If you haven’t already, begin by identifying the cause(s) that matter most to you. The following questions may be helpful in this process:
After identifying a cause, the next step is to determine the charity/charities to which you will contribute. If you don’t already have an organization in mind, there are a number of resources available to assist you in selecting a charity. The websitewww.charitynavigator.org is an excellent online resource for finding charities with a national focus. The site allows you to browse charities by category, view top ten lists based on various criteria, or review thousands of charitable ratings. In addition to the information about specific charities, the site also offers a host of other tips and resources to help you make the most out of your charitable giving.
If you would like to concentrate your efforts locally, Nonprofit Association of the Midlands (www.nonprofitam.org ) will be launching an online database called Community Compass in the next few weeks. This comprehensive database will have publicly available data on every non-profit organization and program in Nebraska and in 19 counties in Southwest Iowa.
Plan Your Giving
There are numerous complex tax rules regarding charitable contributions, so it is advisable to seek professional guidance to help you evaluate your own personal situation. Generally speaking, if you itemize your deductions on your tax return, gifts to qualified charities are deductible in the year they are made.
Most people simply write a check or donate cash for their charitable contributions; however you may be missing out on an additional tax savings that could help stretch your charitable dollars farther.
Rather than donating cash, a gift of long-term (held more than 12 months) appreciated stock or mutual funds will result in two tax benefits. You will be able to deduct the fair value of the stock as an itemized deduction, and you will also avoid the realized gains that would be associated with the sale of the appreciated shares.
For example, let’s say you plan to donate $20,000 to your favorite charity. To do this you plan to sell stock worth $20,000 you purchased several years ago for $10,000. After the sale of the stock, you would owe federal capital gains tax of 15% on the gain (state tax may also apply), resulting in a tax bill of $1,500.
If however you donate the $20,000 in stock to the charity, the charity will avoid paying taxes on the sale of the stock. You enjoy the additional benefit of never having to pay taxes on the stocks appreciated value resulting in a tax savings of $1,500!
Accelerate Charitable Contributions for Larger Impact
Consider giving more in years where you are subject to higher income tax rates for maximum benefit. If your income fluctuates from year to year, or you have a significant event that spikes your income for a single year, accelerating your giving may produce bigger tax savings. If you like the idea of accelerating your contributions from a tax perspective, but dislike the idea of uneven contributions from year to year, consider opening a Charitable Checkbook® at the Omaha Community Foundation (www.omahafoundation.org).
When you donate cash or appreciated securities to a Charitable Checkbook®, you are eligible for a tax deduction in the year the donation is made. You are then able to decide on the timing of your grants to charity – there is no requirement to direct a grant from your account in a given year. You can take the deduction in one year, and spread the gift to the actual charities out over several years.
With a little reflection and financial planning, you can become a more proactive philanthropist. Like Bill and Jane, you may find this approach more rewarding in a personal and financial sense.