We're often asked to help our clients think through a strategy that fulfills their desire to fund causes they believe in and their desire to save on taxes. Many times, clients don't put much thought into charitable giving, viewing giving as a reactive response rather than a proactive decision. For example, you may give to a friend or family member's fundraising effort when asked, but without the prompt, charitable giving may not cross your mind.
Lately, however, individuals are becoming more intentional about gifting and thinking about the impact that gift may have on a chosen charity. This strategic approach combines tax-effective, cash flow-efficient management with focused giving. Designing a gifting strategy turns your giving into a proactive plan where you decide:
- The amount you intend to allocate from your annual budget to charities and causes.
- Whether you want to make fewer larger gifts or more smaller gifts in consideration of how those gifts may impact your chosen charities.
- How to give tax-effectively based on your assets and life stage.
Step 1: Budget to answer the question, "How much is enough?"
'Enough' is a word that gets used often when talking about funding various financial planning goals, but it takes on a slightly different meaning when discussing a giving strategy. 'Enough' often lives somewhere at the intersection of two questions:
- "How much can you afford to give?"
- "What makes you feel good about the amount you plan to give?"
Our bucket budgeting cash flow system can help you take a look at all of your expected expenses for the year and help you answer the question of how much you can afford to give so you can focus on the question of how much feels right for you.
Step 2: Create a list of charities you would like support
Choosing a charity (or charities) to give to is a matter of personal preference. What motivates you? What causes are important to you? What causes need your gift the most right now? How will their needs change in the future?
If you don’t already have a list of the charities you want to include in your gifting plan, here are a couple of links that may help you with your search.
In this step you will also want to think about how you want to spread your giving budget across your charities of choice. Would it feel more meaningful to give a larger gift to fewer charities or to sprinkle your giving across many organizations.
Step 3: Leverage tax efficiency incentives
You likely know that charitable giving can carry tax benefits, but structuring your gifting strategy with specific tax advantages and incentives in mind can help you give more efficiently and for longer.
Here are three primary ways individuals can plan around tax-efficient giving:
Appreciated assets
While check or cash are the most common types of charitable donation, giving long-term appreciated securities may have attractive tax benefits. If you have taxable assets held outside of your retirement accounts, you may have gains that are not taxable when given to a charity. For example:
- If you purchased stock for $50 and it grew to $100 and you sold the stock, you would have to pay taxes on the $50 of gain. If you gave the charity what was left after you paid the taxes, you may only have $90 to give (assuming 20% in taxes on the gain).
- If you donated the shares of stock directly to the charity before selling them, the charity would receive the full $100 donation and you would potentially be able to deduct the full $100 gift instead of only $90. It's a win for the charity and a win for you.
Establishing a donor-advised fund (DAF)
Many taxpayers now use the standard deduction when filing their taxes because they do not have enough deductions to make itemizing work for them. Establishing a DAF allows you to bundle multiple years of giving, use it to fund the DAF all in one year, take the larger deduction, and have enough deductions to itemize in that tax year. You receive a tax deduction in the current tax year and then can recommend grants to your charities from the DAF over time.
For example: If you usually give $3,000 per year and bundled your giving for 5 years, you could…
- Donate to the DAF $15,000 in one year,
- Take the full $15,000 deduction in the current tax year (assuming this pushed you over the itemized threshold), then
- Grant money from the DAF to your charities gradually over the next 5 years.
You end up giving your budgeted amount but get more tax deductibility – assuming you can itemize.
Using a qualified charitable distribution (QCD) from an IRA to satisfy your required minimum distribution (RMD)
If you are at least age 72, have an IRA, and plan to donate to charity this year, you might consider making a QCD from your IRA. This action can satisfy charitable goals and allows funds to be withdrawn from an IRA without any tax consequences. A QCD can also be appealing because it can be used to satisfy your required minimum distribution (RMD) – up to $100,000.
If you've never budgeted around charitable giving, talk to your financial partner about creating a strategic plan. A giving plan utilizes your resources to impact more of the causes that matter most to you today while leveraging tax benefits and efficiencies to streamline future giving.
