Greetings from the community foundation!
Thank you for all you do to improve the quality of life in our region. We continue to be inspired by the generosity of our community. In each and every conversation with fundholders, donors, and community leaders, our team learns so much about all of the ways you are making lives better for the people who live here. Many of you have established funds at the community foundation to support the causes you love. Others are serving on boards of directors of local nonprofits. Some of you are involved in discussions with your family and your advisors about establishing a fund at the community foundation to fulfill your philanthropic goals.
Wherever you are in your charitable giving process, we are here to support you. The community foundation is just that–the community’s foundation–and we are here to help increase charitable giving, deepen your connections with the causes you care about, and provide leadership on critical community issues.
We hope you enjoy this newsletter, where we’ve captured updates on issues that are trending in the charitable giving world and covered topics that are bubbling up in conversations with our fundholders.
We look forward to continuing to serve you. If we’re not yet working together, we hope you’ll reach out with questions about the topics below or anything else that captures your attention and imagination in the world of philanthropy.
With gratitude,
Your community foundation
Keeping track of your charitable donations is more important than ever
When the Inflation Reduction Act was signed into law in August, many taxpayers were relieved that the Act did not include heavily-debated proposed tax hikes that were so prominent in early versions of the legislation. What’s weighing on a lot of taxpayers’ minds, however, even more heavily than the few changes to income tax rules, is the Act’s $80 billion in funding increases for the IRS.
The IRS will use the money to shore up its staffing, technology, and, notably, enforcement efforts. The additional capacity means that the IRS’s customer service should improve. It also means that the chances of audits almost certainly will increase.
A well-known trigger factor for audits is a list of charitable deductions that looks out of whack. It is very important to understand the rules for charitable deductions and keep track of your donations in detail.
Establishing a fund at the community foundation is an easy way to organize and track your charitable giving. Perhaps you and your family already take advantage of this feature by making a single, tax-deductible transfer of highly-appreciated stock each year to your fund. If you are deploying this tax-savvy technique, you know that the proceeds from the sale of the stock–free from capital gains tax–are then used for distributions from the fund to support your favorite charities. No matter how many different charities receive support from your fund, you still have just one receipt to keep track of charitable donations for income tax deduction purposes.
The community foundation offers different types of funds for different types of giving. We’ll work with you to set up a fund to meet your specific needs. Many of our donors have even established two or more separate funds to fulfill different goals.
Available types of funds include:
Donor-advised fund. A donor-advised fund enables you to establish a dedicated account for charitable giving. You make tax-deductible contributions of cash or other assets to the fund, and then you are able to recommend grants to favorite charities.
Unrestricted fund. The community foundation has its finger on the pulse of the community’s most pressing issues. An unrestricted fund gives you the opportunity to support community needs that can’t be identified until the future. One of the biggest benefits of a community foundation is its perpetual structure that allows you and your family to offer support to nonprofits that evolves over time as priorities in the region shift.
Field-of-interest fund. If you would like to target your giving to specific areas of community need (such as education, health, environment, or the arts), you can create a field of interest fund to establish parameters for grant making under the ongoing guidance and expertise of the community foundation’s staff.
Designated fund. A designated fund allows you to direct your giving to a specific nonprofit organization. Over time, the community foundation's staff manages the distributions from the fund according to the terms you’ve established.
Any of these funds enables you to organize your giving for tax purposes, which helps you stay prepared in the event of an IRS audit.
Here’s what to know before giving money to a new nonprofit
The number of nonprofits in the United States now tops 1.7 million, and hundreds more are started each year. As the nonprofit sector grows alongside the increased needs in our community, you may be asked by friends or colleagues to support a brand new nonprofit organization. You want to help, but you’re not sure about the rules.
First, remember that you can give money to anyone and anything you want, charitable or otherwise. If you want to be sure that your money is put to good use, check things out. If the charity has started a website, take a look at it and see if it makes sense. Even new charities should be able to clearly explain what they are doing and who exactly it is that they are serving. Also take a look at who’s involved. Perhaps the friend or colleague asking you for help is on the charity’s board or is even a founding staff member. If you know and trust the people involved, that is a good sign.
Your questions may boil down to whether you are hoping to get a charitable deduction for your contribution to the new charity. The IRS has very specific rules about which types of donations are deductible and at what levels. If the new charity has filed an application (Form 1023) with the IRS to qualify as a 501(c)(3) charitable organization, and you make a donation to the charity while the application is pending, you still may be able to deduct that donation on your income tax return, provided the charity does in fact receives its exemption ruling from the IRS. You are taking a risk, though. If the charity’s application fails, you cannot deduct your donation.
Please reach out to the community foundation with any and all questions about how best to support charities and causes in our community. It’s our job to provide insights not only related to the tax aspects of charitable giving, but also related to the effectiveness of charitable giving and the impact of the nonprofit organizations that serve our community.
How to grow your charitable giving by bundling tax savings
Many donors elect to use a donor-advised fund at the community foundation as an organizing tool, frequently recommending grants to their favorite charities in ways that mirror the ways they would make donations outright. Often, contributions to a donor-advised fund are in the form of highly-appreciated stock or other hard-to-value assets that generate a favorable tax outcome. Using a donor-advised fund in this way is very effective to get resources into the hands of the nonprofits who need it to fulfill their missions.
Because the charitable income tax deduction is not currently available to taxpayers who do not itemize, however, you may worry that you have less incentive to give to charities during certain years. A donor-advised fund can help with that. Consider a situation where you have a high-income year and you make a large contribution to your donor-advised fund in that year. You are able to benefit from the charitable deduction because you are eligible to itemize deductions on that year’s tax return. Let’s assume, then, that your income is lower in the next two years; therefore, you do not itemize deductions. This means you have a reduced tax incentive to support charities, although you have loads of philanthropic incentive!
In this situation, the “bunching” strategy you deployed in year one allows you to support charities from your donor-advised fund in years one, year two, and year three. This technique creates important financial motivation to complement your philanthropic motivation. This, in turn, keeps your giving strong and steady across the years, which is very much appreciated by the charities you support.
The community foundation is happy to help you develop a charitable giving plan that meets both your tax planning objectives as well as your desire to support the charities you love.
The team at the community foundation is honored to serve as a resource and sounding board as you build your charitable plans and pursue your philanthropic objectives for making a difference in the community. This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. Please consult your tax or legal advisor to learn how this information might apply to your own situation.