New tax deductions introduced under the CARES Act, combined with a growing need on the part of many nonprofits to sustain their missions amidst the COVID-19 pandemic, provide a strong incentive for those who can give to do so in 2020. However, the proliferation of coronavirus-related scams has made it more important than ever to vet charitable organizations this year to ensure your dollars are not only going to legitimate organizations, but are being used effectively to support the programs and causes you embrace.
If you don’t already have a plan in place, now is the time to focus on your year-end charitable giving strategy. The tips below will help you make the most of your 2020 charitable donations.
CARES Act offers generous incentives for giving in 2020
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act“) was signed into law on March 27, 2020 to offer financial assistance to individuals, families and businesses affected by the COVID-19 outbreak. Among the provisions contained in the $2 trillion aid package was the expansion of certain tax deductions for 2020. These include an “above-the-line” deduction of up to $300 for individuals ($600 for a married couple filing joint) making cash donations to charity who do not itemize and will take the standard deduction on their 2020 tax returns.
For those who will itemize, the incentive to give is even greater. The Act removes the 60% of adjusted gross income (AGI) limitation for most cash gifts to public charities for 2020. That means you can offset up to 100% of your income in 2020 with charitable contributions. Contributions in excess of this amount can be carried forward for five years subject to the 60% of AGI limit in those years.
However, it’s important to note that both of these provisions under the CARES Act only apply to cash contributions and are not available for contributions made to donor advised funds or gifts to 509(a)(3) supporting organizations.
While tax deductions can be a great incentive for giving, they are not the sole reason Americans choose to give. Despite 2017 tax law changes, which resulted in fewer Americans itemizing on their returns over the last two years—enabling them to deduct charitable donations—2019 ranked among the highest years ever for charitable giving. According to Giving USA, individuals, bequests, foundations and corporations gave an estimated $450 billion to U.S. charities in 2019, a 4.2% rise over 2018. This year was anticipated to exceed those numbers.
The Philanthropy Outlook 2020 & 2021 study, which was published in February shortly before COVID-19 was officially declared a pandemic, projected inflation-adjusted growth rates for giving by individuals of 4.4% in 2020 and 4.7% in 2021. However, data released this summer by the Association of Fundraising Professionals indicates that more than half of charitable organizations in the United States are expecting to raise less money in 2020 than they did in 2019, and an equal percentage believe the same will occur in 2021. Economic uncertainty, high unemployment and the inability to host in-person fundraising events during the pandemic have all contributed to the drop off in donations.
Why vetting charitable organizations has become more important than ever
While donations to charitable organizations may be in decline, coronavirus-related scams have risen at an unprecedented rate, according to a number of government agencies that track and report cyber crimes and fraud. Among them, the Department of Homeland Security, the Consumer Protection Bureau, the IRS, and the Federal Trade Commission have sounded the alarm on COVID-19 related scams and published tips and advice to help consumers avoid them. However, avoiding scams to ensure your donations go to worthy and legitimate organizations is just the first step in vetting charitable organizations. You also want to make sure your donations are being used as effectively as possible by these organizations to further their mission and specific programs. One way to achieve this is by reviewing each organizations’ Form 990.
While most tax-exempt nonprofits do not pay federal taxes, they are required to file information with the IRS. Form 990 is used by government agencies to prevent organizations from abusing their tax-exempt status and to make sure that nonprofits conduct their business in a way that is consistent with their public responsibilities. Since the form must be made public, it provides an easy way for donors interested in supporting a particular cause to find and evaluate charities.
While Form 990 can help potential donors root out fraudulent charities and gross underperformers, it does not tell you how effectively your donations will translate to results on the ground. For example, Form 990 won’t tell you the percentage of donations that go toward executive compensation versus program spending or fundraising expenditures. To determine how individual organizations appropriate the funds they receive, you may need to source that information directly from the organization, either on their website (if financial data is made accessible) or by contacting the organization to request specific information.
Fortunately, several nonprofit watchdogs already do much of this work for you for free. Organizations like GiveWell, Charity Navigator, and GuideStar compile detailed information on thousands of nonprofit organizations. Their databases provide prospective donors with a wealth of information from how each dollar raised is spent by the organization from the percentage that goes directly to program spending, versus fundraising or telemarketing efforts, to rating organizations based on overall financial health, accountability, and transparency.
The bottom line on giving in 2020
While charitable giving is an important part of any comprehensive financial strategy, you want to make sure that your own financial health is sound before giving to others. Once you have determined that you are in a position to give, it’s important to work closely with an independent financial advisor to determine a tax-smart strategy that meets your needs and the needs of the organizations you support. And don’t forget! The deadline for making 2020 donations is December 31st, so the time to get started is now.
To learn more about this or other aspects of year-end tax planning, download our complimentary Year-End Tax Checklist.
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