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Plan for Charitable Giving to Give the Most

In 2018, total charitable donations from individuals reached $427.71 billion, according to Giving USA. But was all of that generosity well planned, and could those dollars have done more if they had been donated differently?

For you and your charities of choice to benefit the most from your donations, you’ll need to create an informed charitable giving strategy that fits into your larger financial plan and budget. Doing so will also alleviate pressure — or guilt — when asked to give throughout the year because you’ll already have a plan in place of why, what, and to whom you’re giving!

Why to give

People donate to charitable organizations for many reasons — to support humanitarian causes, religion, education, animals, the environment, and fine and performing arts, among others. Charitable giving is also an opportunity to pass on values to family members about prosperity and helping others, to stay engaged and informed on issues that are important to you, and even to receive financial advantages, like tax benefits.

What to give

While time, skills, knowledge, cash, checks, and second-hand items are the most common ways to donate to charities, there are other assets you should consider that could result in a larger contribution and impact to the charity.

Publicly traded appreciated securities (owned for more than a year):

  • Stocks
  • Bonds
  • Mutual fund shares
  • Life insurance

Non-publicly traded appreciated assets:

  • Private or restricted company stock
  • Shares of a privately owned business
  • Real estate

When you donate long-term appreciated assets, you are usually entitled to the full fair market value (FMV) tax deduction at the time of your gift. You may also be able to eliminate the incurred capital gains taxes when you give assets directly to a charity. If you take advantage of these tax-saving opportunities, you may be able to donate more than simply selling the asset and donating the cash.

To whom to give

To make the most of your philanthropic efforts, be sure to research and evaluate nonprofit organizations you’re considering. Follow these steps as part of your due diligence:

  1. Decide what types of causes mean the most to you. Consider your values, experiences, and interests.
  2. Research where to give. Consider your charitable giving an investment like any other and make sure the organizations you choose to support are trustworthy and truly making an impact.
  3. Determine how to make the biggest impact for the charitable causes you care about by researching how you can help with donations of time and assets and when you can make those donations. Be sure to incorporate any donations of financial assets into your yearly budget.

Tax advantages

One of the advantages of properly documented charitable giving is a reduced tax obligation when it comes to income tax, capital gains tax, or estate taxes.

Income Tax — Donations to qualified charities are tax deductible and may reduce your income tax obligation. In most cases, you would be entitled to a deduction equal to the FMV of the contribution. There are, however, limitations against your adjusted gross income (AGI) to what you can deduct in a given year. As of 2018, cash gifts to qualifying charities are deductible up to a ceiling of 60 percent of adjusted gross income

Estate Tax — Qualified donations can be used to reduce this tax as well. There is no limit to how much can be deducted from estate tax.

Capital Gains Tax — For donated short-term assets, your income tax deduction will be limited to the lesser of the FMV or your cost basis in the asset. The IRS will treat this as a cash contribution, and it will be deductible against your AGI up to 50% for a public charity and 30% for a private foundation.

With donated long-term assets, if you sell the appreciated securities and then donate the after-tax proceeds, you will generally be able to eliminate the taxes on that capital gain, so the charities to which you give receive a larger donation.

As always, be sure to consult with a financial, legal, or tax professional before making any decisions as there may be tax and legal rules that apply to your circumstances that are not covered above.

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