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15 Charitable Giving Pitfalls to Avoid

15 Charitable Giving Pitfalls to Avoid

November 06, 2023

‘Tis the season for end-of-year charitable giving.

As we build our holiday budgets, most of us take into consideration not just loved ones, but what we can give back as well. That’s especially true if we’re donating to organizations we’re passionate about or feel inclined to give a little extra with the spirit of generosity. And let's not forget, making those last-minute donations can also bring valuable tax deductions, trimming down your taxable income for the year.

However, in the hustle and bustle, it's easy to rush into our giving decisions, potentially missing out on maximizing 2023 tax benefits. So, as the year closes, here's your guide to sidestepping common pitfalls, ensuring every donation you make counts, both for the cause and your finances.

1. Not Verifying Tax-Exempt Status                                                                                                                                                                                                                                                                                                     Before donating, make sure the organization has IRS-approved tax-exempt status. Giving to groups lacking a 501(c)(3) designation might exclude you from tax write-offs.

2. Overlooking Documentation                                                                                                                                                                                                                                                                                                                 No matter the donation amount, always obtain a receipt. Proper documentation is crucial for tax purposes. Without it, you may miss out on claiming these donations as deductions.   Tip: Cash donations under $250 don’t require a receipt, but they may require your bank transaction records.

3. Missing the Year-End Deadlines                                                                                                                                                                                                                                                                                                           To be eligible for tax deductions in the current year, ensure that your donation is carried out by December 31. Gifts made even a day later will be deductible for the following tax year.                                                                                                                                                                                                                             

4. Neglecting Appreciated Assets                                                                                                                                                                                                                                                                                                   While cash donations are simple, offering assets like stocks that have grown in value can be a smart tax move. This approach can help avoid capital gains tax and might let you deduct the asset's entire market worth.

5. Accidentally Inflating Donation Value                                                                                                                                                                                                                                                                                             When donating items such as clothing or furniture, it's essential to gauge their true market value accurately. Overvaluing these donations can draw IRS scrutiny. For a reliable estimate, refer to charity-provided guidelines or seek advice from a tax expert.

6. Forgetting to Bunch Donations                                                                                                                                                                                                                                                                                                     With the increased standard deduction, some taxpayers may benefit from "bunching" their charitable contributions. This means making larger donations in one year and less in the next to maximize deductions. By strategically planning when and how much to donate, you optimize tax benefits over multiple years.

7. Missing Out on Matching Opportunities                                                                                                                                                                                                                                                                                         Many employers offer matching gift programs where they match their employees' charitable donations. It’s worth checking with your company to avoid leaving money on the table. 

8.Overlooking Required Minimum Distributions (RMDs)                                                                                                                                                                                                                                                        If you're 70.5 or older with an Individual Retirement Account (IRA), you have the option to directly donate to charities from your RMDs. This approach meets your RMD obligation while offering a charitable solution without adding to your taxable income. By utilizing this method, retirees can both support causes they care about and manage their tax liabilities.

9. Unknowingly Making Non-Deductible Gifts                                                                                                                                                                                                                                                                            While it's great to give generously, keep in mind that not every donation is tax-deductible. Donations to individuals, political entities, or lobbying groups, for example, won't qualify for tax deductions.

10. Ignoring Donor-Advised Funds                                                                                                                                                                                                                                                                                                       Some individuals overlook the benefits of donor-advised funds (DAFs). These allow donors to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time.                                                                                                                                                                  

11. Failing to Keep Track of Recurring Donations                                                                                                                                                                                                                                                             Automated monthly donations are convenient, but it's easy to forget about them. Regularly review and keep track to ensure you claim the cumulative amount.

12. Not Considering Volunteer Time                                                                                                                                                                                                                                                                                                While you can't deduct the value of your time spent volunteering, you can deduct certain expenses related to your volunteer work, like mileage or supplies.

13. Skipping Research Into the Charities' Needs                                                                                                                                                                                                                                                                     Giving without understanding what a charity truly needs can result in donations that are less helpful. For instance, during the holidays, food pantries may need monetary gifts more than perishable supplies.

14. Mistakes in Charitable Receipts                                                                                                                                                                                                                                                                                                     Ensure that receipts from charities clearly list the donation amount, date, and the organization's details. Mistakes can happen, and having accurate documentation is vital.

15. Failing to Consult a Tax Professional                                                                                                                                                                                                                                                                                           Tax rules, especially around charitable contributions, can be complex. Consulting with a tax advisor when you have questions can ensure you're making the most of your donations and avoiding potential pitfalls.

Giving is a heartfelt gesture that truly impacts lives. As you share your generosity, be mindful to ensure that each cent of your gift reaches its intended destination, all while optimizing the tax advantages available to you. 

Contact us at Wealthspring if you have questions about charitable giving or to create a financial plan that holistically addresses all your charitable goals.