Do you give to charity or have you ever been curious how to start mindfully making donations? Maybe you’ve also wondered whether there are ways to maximize the benefits of giving for yourself and the organizations you donate to?
In short, there is. Charitable giving remains a timeless and impactful way to contribute to the well-being of communities you care about. Despite economic uncertainties from the past several years and market fluctuations, individuals and families can also explore meaningful avenues to maximize their charitable donations.
Here are some key strategies for optimizing your philanthropic efforts.
Why Donate?
Before exploring the ways to streamline and optimize your charitable strategy, it can be helpful to know your ‘why’ behind giving. So, why should you donate to charity?
There are several compelling reasons that people consider when giving:
- Making a Positive Impact: Charitable giving lets individuals and families impact causes and issues they care about, contributing to positive change in the world.
- Personal Fulfillment: Many people find fulfillment and purpose in giving back. Knowing your contributions are making a difference can be emotionally rewarding.
- Social Responsibility: Giving to charity is a way for individuals to fulfill their social responsibility and contribute to the well-being of society. It helps address social issues they’re passionate about and promotes a sense of community.
- Tax Benefits: Depending how you donate, charitable donations may be tax-deductible. This can provide financial incentives for individuals to give to worthy causes and be an added benefit if you were already considering giving as part of your spending plan.
- Building a Better Future: Charitable giving supports initiatives that aim to build a better future, often in the areas of education, healthcare, environmental conservation, and other timely arenas.
- Inspiring Others: When individuals publicly support charitable causes, it can inspire others to do the same. It creates a ripple effect, encouraging a culture of generosity and compassion. This is especially true for parents and grandparents who want to instill a charitable mindset in future generations.
Ready to align your money with your values?
Setting Goals
Charitable giving is a fantastic vehicle for reducing your taxable income, both now and in retirement – but that’s not the core reason most families choose to give. They’re focused on creating a lasting impact and a legacy they’re proud of.
If charitable giving is something you’re excited about, it can be worthwhile to set a few goals. Start by identifying your passion and priorities. For example, you might be passionate about your local humane society, supporting education, or championing human rights. Here’s a few things to be mindful of when starting your goal-setting journey:
- Establish a percentage of your income or assets you want to donate each year. Some people start with a round number such as 10% for donations. Others plan their giving based on their portfolio performance each year by donating appreciated assets to offset taxable gains. Whatever your unique goals are, setting a donation goal can help you structure and prioritize how you give.
- Decide the consistency of your donations. Some people donate monthly, quarterly, or yearly. It’s worth remembering that many organizations benefit from more frequent, smaller donations as opposed to hefty annual contributions.
- Define the type of impact you want to make. Increased frequency can help boost a charity’s operating budget. However, some causes may benefit from short bursts of giving (like a humane society trying to build a new shelter). You can also diversify across smaller community organizations and large international nonprofits, opt to make a local community impact, or support organizations that work to enact national political change.
Researching Charitable Organizations
After you have an idea of how much and how often you plan to donate, you can determine which specific organizations to support. When researching charitable organizations and nonprofits, look for a few key items:
- Are they a 501(c)(3)? This is how nonprofits are labeled if they are tax-exempt. If an organization is a 501(c)(3), your donations qualify for certain tax deductions.
- Check for financial accountability. Where is the organization spending donations? Transparency in their financial reporting can clarify whether or not your donation will make the impact you want.
- Assessing impact. What type of work is the organization doing? Are they accomplishing goals or reaching milestones?
You can research different charities using resources like Charity Navigator or Guidestar.
Effective Donation Methods
Many families donate the “traditional” way – with cash. They organize automated contributions, or write a check at set intervals to support causes they care about. However, charitable giving doesn’t have to be limited to cash; you can donate appreciated assets, valuable items, food, or your time. Just be sure to contribute to qualified charitable organizations like 501(c)(3)s to ensure you retain the tax benefits. Here are some other ways to think about giving:
Donation Bundling
Consider bundling your donations over a shorter time frame to alternate between itemizing and taking the standard deduction. This method lets you amplify the impact of your contributions while maintaining tax efficiency.
Example: Andre and Jasmine, passionate about community support, choose to condense two years’ worth of donations into one, providing the same support to charities while optimizing their tax benefits. Since they’ve donated more, they can deduct more at once and balance out a potential windfall that would have bumped them into a higher tax bracket.
Of course, there can be downsides to donation bundling. Some charities benefit from more consistent donations or donors want to provide support more often. Talk with your financial advisor about finding a balance that works for you.
Donor Advised Funds (DAFs)
Opening a DAF presents a flexible and efficient channel for charitable giving. Fund the account with various assets and enjoy tax-deductible contributions with tax-free growth. DAFs offer a strategic way to support multiple charities through one platform, allowing you to contribute throughout the year.
You can also let donations rest in your DAF for an extended time period without making donations from the account. This can be helpful if you know you want to donate someday, you want to take advantage of the tax benefits right now, but you’re unsure where to donate.
Gift With a Qualified Charitable Distribution (QCD)
If you’re 70½ or older and have an Individual Retirement Account (IRA), you can make a QCD. This lets you directly transfer up to $100,000 per year from your IRA to a qualified charity without counting it as taxable income.
Maximize Your Tax Benefits
Understanding the tax landscape is essential for effective giving. There are several ways to reduce taxable income and minimize your tax liability while giving:
- Itemize Your Deductions: To claim charitable deductions, you must itemize them on your tax return using Schedule A (Form 1040) instead of taking the standard deduction. Make sure your total itemized deductions, including charitable contributions, exceed the standard deduction amount.
- Donate to Qualified Charities: Be sure the charities you donate to are qualified tax-exempt organizations. Most recognized nonprofits, religious organizations, and certain other entities like civic leagues or social welfare organizations qualify.
- Keep Detailed Records: Maintain detailed records of your charitable contributions, including receipts, canceled checks, and bank statements. In case of an IRS audit, documentation is crucial for substantiating your deductions.
- Maximize Donations of Appreciated Assets: Donating appreciated assets, such as stocks or real estate, can provide additional tax benefits. You may be able to deduct the fair market value of an asset without paying capital gains tax on the appreciation.
- Employer Matching Programs: Check if your employer offers a matching gift program. Some companies match their employees’ charitable contributions, effectively doubling the impact of your donation.
- Take Advantage of Special Deductions: Be aware of special deductions like the enhanced charitable deduction for cash contributions introduced during specific disaster relief efforts. Stay informed about any temporary tax incentives related to charitable giving.
It’s important to stay informed about changes in tax laws and regulations, as these can impact the deductibility of charitable contributions. Always consult with a tax professional or your financial advisor to ensure compliance with current tax laws and to maximize your tax benefits.
Giving With Intention
Charitable contributions extend beyond financial support. Volunteering time, serving on boards, and engaging in community service are invaluable ways to make a meaningful impact. Giving with intention adds a personal touch to your philanthropy, aligning your values with your contributions.
You can also incorporate giving into your lifestyle – talking to your children or grandchildren about how you support your community and the causes you’re passionate about. This often leads to a more fulfilling experience that goes beyond writing a check, and can even lead to generational giving that transforms organizations and sparks lasting change.
As you embark on a journey to expand and fine-tune your charitable contributions, remember that giving is a personal and potentially transformative experience. Whether through financial support or active involvement, aligning your resources with your values creates a lasting impact. If you’re ready to incorporate charitable giving into your financial plan, we’re here to guide you. Schedule a call with an Abacus advisor today, and let’s expand what is possible with giving.
Disclosure:
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Abacus account holdings correspond directly to any comparative indices or categories.
Please Also Note: This material is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Abacus Wealth Partners is not an accounting firm. Abacus Wealth Partners does not provide tax or legal advice, and nothing contained in these materials should be taken as tax or legal advice. Please consult with your tax professional regarding your specific tax situation when determining if any of the mentioned strategies are right for you.
