As the holiday season approaches, charitable organizations ramp up their appeals for year-end contributions. Instead of responding to each request in isolation, consider developing a comprehensive charitable giving strategy to maximize the impact of your donations and simplify your giving.
Years ago, a generous elderly client discovered she had inadvertently sent multiple checks to several charitable organizations. This realization led her to adopt a more organized and simplified approach to charitable giving – a lesson we can all benefit from.
Developing Your Charitable Impact
Creating a charitable giving strategy can lead to more impactful and efficient results. Consider the following when developing your approach:
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- Identify causes that align with your values.
- Determine your desired level of involvement with charitable organizations.
- Decide whether to involve family members in your giving decisions. Engaging family members in charitable giving can be an excellent opportunity to demonstrate family values and provide financial education.
Modern Approaches to Charitable Giving
There are numerous ways to give, and often, a combination of techniques yields the best results. Here are some popular approaches we discuss with clients:
Donor Advised Funds (DAFs)
A DAF is a charitable investment account that enables individuals to contribute cash, securities, or other assets to the account, receive an immediate tax deduction, and then recommend grants from the account to their favorite charities over time. DAFs are offered by many financial institutions, including Schwab, Fidelity, and Vanguard, and may also be available through other organizations, such as a local community foundation.
DAFs have broad appeal due to their numerous benefits:
- Low or no minimum to open an account
- Low minimum grant request amounts (as low as $50)
- Support multiple charities with a single contribution to the DAF
- Minimal administration costs
- Simplified recordkeeping for tax preparation
- An immediate tax deduction is received in the year of the contribution to the DAF. You must itemize deductions on your tax return. There are limits on the total amount that can be deducted based on the type of asset donated and your adjusted gross income. Check with your advisor or your tax professional for what works for your unique situation.
- Separates the timing of the donation for tax purposes from the timing of the grant to the charity, offering flexibility.
- Can be used as an estate planning tool, supporting your charitable legacy goals.
Donating Appreciated Securities
This often-overlooked method involves donating appreciated securities directly to charities instead of cash. Benefits include:
- Avoiding capital gains tax
- Qualifying for a tax deduction as long as you itemize deductions on your tax return
- Allowing the charity to benefit from the full value of the donated securities
Note: To maximize tax benefits, the securities must be held for more than one year before donating them.
Qualified Charitable Distributions (QCDs)
A qualified charitable distribution (QCD) is a distribution of funds from your IRA (other than a SEP or SIMPLE IRA) directly to a qualified charitable organization.
For individuals who are 70½ or older, QCDs can offer a tax-efficient giving option:
- Donate up to $105,000 per year directly from an IRA per individual.
- The distribution counts toward your required minimum distribution (RMD); currently, people who hold IRAs are required to take RMDs beginning at age 73.
- The QCD amount does not count as ordinary income as it is a direct gift to the charity.
Note: Ensure your gift is substantiated and you receive no benefits in exchange for the donation. If you write a check drawn on your IRA, be sure to confirm that the charity has cashed the check during the calendar tax year.
Balancing Compassion and Smart Giving
While charitable appeals often tug at our heartstrings, it’s possible to balance compassion with strategic giving. Thoughtfully considering your options can make your donations more impactful and aligned with your values.
Remember, a well-planned charitable giving strategy not only benefits the causes you care about but can also provide personal financial benefits and create a lasting legacy of generosity.
Consider consulting with a financial advisor or tax professional to determine the best charitable giving strategy for your unique situation.