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For Maximum Impact, Develop a Charitable Giving Plan

For Maximum Impact, Develop a Charitable Giving Plan

September 23, 2020

Your last name doesn’t need to be Rockefeller to have a charitable giving plan.  Charitable giving means different things to different people.  Some of my clients tithe which by definition means giving 10% of your income to charity.  Other clients that I work with feel that they pay taxes and that in their mind is charity enough.  Wherever you may fall on that spectrum, there are strategies that can help you to get the most bang for your charitable buck.

The first step is to figure out how much you are going to give.  That number can be calculated in many ways and could be the topic of another article on its own.  After you have your number, decide which organizations you are going to intentionally fund.  Maybe you will give the lion’s share of your contributions this year to one organization and next year another.  Maybe you enjoy giving to fifty different organizations a year.  By devoting your resources to a limited number of organizations, your dollars will go further with that organization.  This doesn’t mean that you can’t still pledge for your friend’s charity walk, but it won’t be the majority of your giving.

Next comes the mechanics of getting the money to the charity.  There are three strategies that we use with our clients.  Please consult your tax adviser as to the specific tax impacts on your personal situation. 

The first is to give appreciated stock.  This stock has to be outside of an IRA or retirement plan.  If you have a stock worth $100 that you paid $20 for it, you would have a gain of $80.  If you have held the stock for over a year (or sometimes two years), you would pay long-term capital gains on the sale.  For most people, this is 20%.  So, for $80 of gain, you would lose $16 to taxes and theoretically only have $84 to give to the charity.  Alternatively, if you give the stock to the charity without selling it first, as a qualified non-profit, they can sell the stock without having to pay the taxes.  This means that they get the full $100.   The follow thru step to this is to take $100 out of your bank account and repurchase the stock at $100.  Your new cost would be $100 and you are impacting your taxes for the future.  This might not be a big difference at the $100 level, but as you add more zeros to the end of the number, it starts to make a significant impact.  For this reason, we usually start employing this strategy with gifts over $1,000. 

If the charity that you want to give money to does not have the ability to accept stock, you want to give smaller donations, or you want to load up your donations in one year and give less in subsequent years (another strategy we could write an entire article on), you may want to consider using a donor advised fund.  You fund it either with appreciated stock or cash and then direct the funds to be paid to charities when you want to have the contributions made.  The big catch is that once you fund a donor-advised fund, you technically give up control of the money.  In return for the loss of control, you are usually given the full tax deduction in the year that you fund it.  There are some specifics around this, so once again consult your tax adviser.  There are several benefits – first, donor-advised funds will allow you to make contributions to charity as low as $100.  So, if you are someone who likes to make a lot of smaller contributions to multiple charities, this may be for you.  Secondly, the charitable gift does not need to be made in the same tax year as when you received the tax deduction.  For example, if you are selling a business and have a particularly high-income year you can fund the donor-advised fund in the high-income year but dole out the money over the next several years.  Finally, you have the option to make the gift to the charity out of the donor-advised fund anonymously.  This means fewer solicitation letters, fewer solicitation calls, fewer free mailing labels or calendars – and more of your donation goes to work in the charity that you are choosing to fund.    With that said, you do have the option to be recognized if you would like to be.

Finally, a lot of my clients are over the age of 72 and are taking required minimum distributions.  If you gift directly from an IRA and are over the age of 72, you are able to receive the tax benefit of the contribution even if you are no longer itemizing your taxes.  The important thing is to have the check written directly from the IRA to the qualified charity – not to have the money deposited into your account and then have you write the check.  Unsure how to do this? Check with your tax adviser. 

By gifting intentionally, you potentially lower your tax bill – both today and tomorrow – and you support the charities you care about in a more meaningful way.