Making the Connection: Charitable Giving and How a Financial Advisor Can Help

Financial planning for charitable giving is a strategic approach that ensures your philanthropic contributions are meaningful and effective. This aspect of financial planning helps individuals and families allocate their philanthropic resources to align with their financial goals and the issues they care about. By thoughtfully mapping out your philanthropic journey, you can make informed decisions about where and how to give. In turn, this careful consideration amplifies the impact of every dollar you donate, making your generosity go further for the causes you're passionate about.

Charitable Giving Trends

Charitable giving is a key component of many people's lives, supporting the causes they care about while managing their financial well-being. Consider some statistics:

• In the United States, nonprofit organizations play a significant role in promoting societal progress. Over 1.5 million registered organizations rely on the generosity of individuals and companies.

• In 2022, charitable donations from Americans totaled an impressive $499 billion.

• Personal donations amounted to $319 billion in 2022, or 64% of the total charitable giving, demonstrating the profound impact that individual contributions can make.

• Foundations contributed 21% of total nonprofit giving in 2022, equating to $105.21 billion.

Charitable funds come from various sources, including family trusts, corporate foundations, and community foundations, all aiming to make a positive difference through planned and structured giving. Commenting on the need to be strategic about giving, Donald J. Greene, Managing Director at Bank of America, National Donor-Advised Fund Executive, says, "One of the strongest ways to magnify your impact is shifting from reactive giving to proactively setting, funding, and deploying your giving budget as part of your financial strategy."

Being strategic ensures that charitable giving aligns with personal financial goals and provides a more targeted approach to philanthropy.

Defining Your Philanthropic Goals

When you start your journey in charitable giving, it's important to set clear philanthropic goals. Take some time to reflect on what you want your charitable donation to achieve. Are you focused on local community support, contributing to global causes, or furthering educational opportunities?

You can add structure to your charitable efforts once you define what's important to you. It might help to discuss your ideas with a financial advisor who can offer insights into how these goals can fit within your overall financial plan. Your advisor can also help you determine a realistic amount to give that won’t compromise your financial well-being or long-term goals.

Setting these targets guides your donations to ensure they have the most significant impact. It provides a sense of personal fulfillment, knowing you are meaningfully contributing to causes that resonate with your values.

Charitable Giving Vehicles

Understanding the diverse methods of charitable giving is vital in maximizing the impact of your donations and obtaining potential tax benefits. The simplest method is cash donations, which are straightforward to execute through credit cards or checks and provide clear documentation for tax deduction purposes.

• Donating stocks or other appreciated securities can offer a substantial tax advantage for those with an investment portfolio. This form of giving allows for a potential tax deduction based on the total fair market value of the donated securities. It may also enable the donor to bypass capital gains taxes due upon sale. As a result, this method could significantly increase the size of your charitable impact while providing a tax benefit.

• When considering larger philanthropic projects, charitable trusts, such as charitable lead trusts (CLT) or charitable remainder trusts (CRT), offer the opportunity to support a charity for a set period, with the remaining trust assets eventually going to the donor or other named beneficiaries. It's essential to carefully assess these options with the help of a professional, as they involve complex planning and management.

• In addition to cash and securities, you can donate other assets like cars, boats, or artwork. The IRS requires detailed documentation for these non-cash contributions, and the process can be more complex to ensure you receive the tax deduction you're entitled to.

• Real estate donations are another option to consider. They can be pretty complex, potentially providing tax benefits while requiring thorough documentation and valuation records.

• Those looking to establish a more formal structure for their giving may consider setting up a private foundation. This option affords significant control over how funds are dispensed and can involve family members in the philanthropic process. While private foundations are subject to more stringent regulations, they afford a wide range of giving opportunities and can provide a concrete tax benefit.

• Donor-advised funds (DAFs) have become increasingly popular due to their flexibility and simplicity. With a DAF, you can make an irrevocable contribution and then advise on the distribution of funds to qualified charities over time. These funds are also designed to offer ongoing support according to the donor's wishes, potentially even beyond the donor's lifetime.

• For the entrepreneurially minded, donating business interests is an advanced strategy. Beyond the potential for substantial tax deductions, this approach can simultaneously generate income while supporting charitable causes, though it's essential to seek professional advice given the complexities involved.

• Lastly, a pooled income fund is another option that allows donors to receive income throughout their lifetime, benefiting the charity after the donor's death. This unique vehicle can provide a continuous income stream to the donor and significant tax deductions.

Regardless of the chosen method, it’s vital to understand the tax implications and benefits of each charitable giving vehicle to ensure it aligns with your financial plan.

How Charitable Giving Impacts Your Taxes

Tax planning is essential to your financial strategy, especially when incorporating charitable contributions. The right moves can support worthy causes and provide certain tax benefits, potentially reducing your taxable income.

When you donate to a qualified organization, the IRS allows you to deduct the amount of your charitable contribution from your adjusted gross income (AGI). This deduction can lower taxable income and reduce tax bills, making charitable donations philanthropic and financially smart.

You can deduct charitable contributions if you itemize deductions on your tax return. This means that instead of taking the standard deduction, you tally up all your permissible expenditures that are out-of-pocket costs for volunteering or charitable giving. However, it’s important to consult a financial advisor to decide whether to itemize deductions when filing your tax return.

The IRS limits how much you can deduct based on your AGI. Generally, you can deduct up to 60% of your AGI in charitable contributions, though lower limits of 20%, 30%, or 50% may apply depending on the type of contribution and the organization. Specific contributions to certain organizations, such as tax-exempt organization donations, may entitle you to a 100% limit as of recent tax law changes.

Donating property instead of cash might make you eligible to deduct the gift's fair market value. If the property has appreciated, you may also avoid the capital gains tax that would otherwise be due if you sold the item.

The Aligned Perspective: Charitable Giving

Charitable giving laws and limits often change, highlighting the importance of staying informed and maintaining accurate records. Keep detailed accounts of all philanthropic contributions to present an explicit claim of itemized deductions. A financial advisor can be instrumental in helping you work through these complexities. They seek to ensure that you're leveraging charitable contributions for both philanthropic good and income tax deduction purposes, doing their utmost to optimize your charitable contribution deduction and align with your overall financial strategy.

Working with your advisor, review your tax strategy regularly to confirm that you're maximizing tax-deductible contributions and minimizing your tax liability. Doing so enhances your ability to give generous contributions while managing the impact on your tax bill efficiently. Remember, when planning income tax deductions related to giving, it's vital to contribute to a qualified organization authorized to receive tax-deductible contributions. Each year during tax season, revisit your approach with your financial advisor to adjust for new tax laws and reevaluate if your charitable strategies are still in sync with any changes in your financial situation.