“Give me five minutes with a person’s checkbook, and I will tell you where their heart is.”
So goes the famous saying, and for good reason. The connection between our money and our values is a powerful one. Whether you choose to save that five-dollar bill you found in the laundry or spend it on a nice latte, how we use our money communicates what’s most important to us.
If you donate regularly to a charitable organization, you likely do so because there is an issue close to your heart which that organization is addressing. You connect with their mission and clearly see the value of the work they do. But like many donors, you may be wondering, “Am I making the most out of my giving?”
Here are three principles you can follow to ensure your charitable donations go farther and make the greatest impact on the causes you care about:
Make a Plan for Your Charitable Giving
From preparing for retirement to saving for a child’s education, planning ahead is critical to every aspect of our financial lives. The same should be true for your charitable giving.
It can be easy to be reactive with your donations. There are so many dire needs in our world today, and you’re inundated with emails and newsletters from a slew of organizations asking for your support. So, you end up saying “yes” to everything, and by the end of the year, you can’t remember who you gave to or what impact your gifts had.
What if instead of being reactive, you took a proactive approach? You could put a plan together at the start of the year, listing each charity whose work and mission align most closely with your values, and then decide how you want to support those charities in the year ahead. And if a new cause or organization pops up on your radar, you can make a note to incorporate it into your plan for next year. This approach allows you to really focus your giving and channel your resources to make the greatest possible impact in the areas that matter most to you.
Set Up Your Gifts So That They’re Tax-Smart
While we all have an obligation to pay Uncle Sam our due taxes, there are some basic strategies you can use to reduce your tax burden — and thus have more money available to support the charities you love.
Strategy #1: Donate securities that you have owned for a long time that have large unrealized capital gains. The charity can then sell the security to collect the cash, but not owe tax because they are a non-profit. If you sold the security yourself and sent the proceeds to the charity, the capital gains tax bill would come to you!
Strategy #2: Make gifts directly from your IRA to satisfy your annual Required Minimum Distribution. This is called a Qualified Charitable Distribution, or QCD.1 Because the gift goes directly to the charity, you never realize the income personally and thus owe no tax. This is especially important if you are not itemizing deductions on your tax return. This has proven to be the case in recent years since the Standard Deduction was doubled.2
Strategy #3: Bunch your gifts. What if the amount you donate every year does not quite add up to the Standard Deduction mentioned above? This is a situation where you could potentially not get any tax benefit from your generous giving. The solution is to "bunch" your charitable gifts. This means doubling or tripling your donations one year and itemizing deductions, then taking the Standard Deduction the following year or two when you are not making any gifts.
Strive for Administrative Simplicity
If you’re someone who gives to multiple charities every year and you struggle to keep track of all those gift acknowledgments, good news! You don’t have to do it alone. By opening a donor-advised fund (or DAF), you can simplify the giving process and do more with your donations.
It helps to think of a DAF as a “charity for all of your charities.” You can donate securities with large unrealized personal gains to the DAF, take a tax deduction now, and then distribute funds to the 501(c)(3) charities of your choice over time. As for administrative simplicity, you don’t need to worry about getting receipts after the DAF sends checks to 20-plus charities. The only “gift receipt” you need to keep track of is the receipt from your DAF contribution. Using a DAF also makes it easy for you to go back and see a record of who you supported, when, and how much was given to them.
How Encompass Wealth Advisors Can Help
We love helping our clients meet their philanthropic goals. It’s one of the most fulfilling things we get to do as wealth advisors. If you need a trusted partner to come alongside you and help make the most out of your charitable giving, reach out to us! We’re always diligent about including your CPA or tax professional in the conversation for the last official word on tax benefits.