Charitable Donations Down, Still Potential Tax Haven

With the nation in the grip of the worst economic crisis in decades, local charitable organizations are struggling to stay afloat. Charities are losing large amounts of essential funding, and at the same time are being stampeded with a surge in demand, partly as a result of rising unemployment and mortgage foreclosures.

The front lines of social charity — homeless shelters, food pantries, and basic health care for those without means — are usually hit the hardest when the economy enters a prolonged downturn.

“We are seeing a situation in which many non-profit organizations have a larger number of individuals needing their services right now, and at the same time there is less money to go around,” said Pearl McElfish, chief development officer with the Northwest Arkansas Community Foundation, a local organization that connects donors with charities.

According to McElfish, there has been a steady reduction in the amount of donations being made to local non-profits, but this is not the only reason for the current hardship.

Many of the NPOs in Northwest Arkansas are dependent on endowments, often left to them in the wills of wealthy individuals.

Endowments are routinely invested in the stock market, and as Wall Street has suffered major losses in recent weeks, these endowments have lost value along with it. Thus the financial deprivation that many charities are experiencing is twofold.

For individuals who want to continue donating to charities in times like these, a change in strategy is advisable.

“Most people are familiar with the strategy of donating appreciated stock,” said Coleman Ward, senior vice president and branch manager of Morgan Keegan investment firm in Fayetteville. “You simply donate the shares outright to the charity and let the charity sell the actual stock and you receive the tax deduction for the full market value of the shares — subject to limitations and so forth.

“But when the market is down, you have to make the most of it. You should sit down and review your portfolio and find those securities that aren’t providing any income or that have lost money. Then you would use a reverse strategy to giving away highly appreciated securities. In this instance, you would actually sell the securities first, then donate the cash to charity, Ward said.

“When you do it this way, you can claim that stock as a loss and right it off on your taxes, and then by giving the proceeds to charity you also get to claim a charitable gift contribution on your taxes. That’s how you make the most of charitable giving in a down market.”

The federal government is also providing incentive for charitable giving by extending the Charitable Individual Retirement Account Rollover until December 31, 2009, as part of the Emergency Economic Stabilization Act passed in early October.

The provision is made retroactive to January 1, 2008, and so is a two year extension. This legislation allows you to make charitable donations directly from a traditional or Roth IRA without incurring federal income taxes.

This provision is subject to rules and limitations: the donor must be at least 70 and-a-half years old, the cap on annual IRA rollovers is $100,000, and the contribution must be a direct gift to charity — meaning planned gifts do not qualify.

The law has the potential to be immensely helpful to local charities.

The NWACF estimates that Americans have a total of $4.7 trillion invested in IRAs, and this new law effectively extends the choice between giving the money to taxes, and giving the money to charity.