The Financial Benefits of Charitable Giving: A Strategic Approach

Written by Michael Canzone

Charitable giving is often viewed as an act of kindness or a way to support a cause you believe in. But beyond the philanthropic impact, it can also be a smart financial move, especially when structured thoughtfully. Strategic giving can help reduce your tax burden, increase the efficiency of your assets, and contribute to long-term financial planning goals.

Below is a look at the key financial advantages of charitable contributions and how to make the most of them.

Tax Deductions: Reduce Your Taxable Income

One of the most immediate benefits of charitable giving is the potential for tax deductions. When you donate to an IRS-qualified charitable organization, you may be able to deduct the value of your donation from your taxable income, potentially lowering the amount of federal income tax you owe.

How It Works:

• Cash Donations: You can generally deduct cash contributions up to 60% of your Adjusted Gross Income (AGI).
• Non-Cash Donations: Donations of property, such as clothing, vehicles, or household items, are deductible at their fair market value.
• Appreciated Assets: If you donate long-term appreciated assets like stocks or real estate, you may be able to deduct the full market value of the asset, up to 30% of your AGI, without paying capital gains tax.

Important Note:

To claim a deduction, the organization must be a qualified 501(c)(3) nonprofit, and you must itemize deductions on your tax return.

Avoiding Capital Gains Tax: Double the Benefit

If you’ve held onto investments that have appreciated in value, selling them could result in substantial capital gains tax. However, donating those assets directly to a charity allows you to avoid those taxes while still reaping a deduction based on their current value.

Example Scenario:

Let’s say you purchased stock for $2,000 several years ago, and today it’s worth $10,000.

• If you sell it, you’ll owe capital gains tax on the $8,000 gain (potentially 15%–20%, depending on your income).
• If you donate it directly, you avoid paying any capital gains tax and may be able to deduct the full $10,000, subject to IRS limits.

This strategy not only benefits the charity but also maximizes the value of your donation and reduces your tax bill more than if you had donated the after-tax proceeds of a sale.

Reducing Estate and Inheritance Taxes

For individuals with larger estates, charitable giving can be an essential estate planning tool. Bequests to qualified charities are typically not subject to estate taxes, which can preserve more wealth for your heirs.

Strategies to Consider:

• Charitable Bequests: Including charities in your will can reduce the overall taxable estate.
• Charitable Remainder Trusts (CRTs): These allow you to receive income during your lifetime, with the remainder going to charity. This may reduce your taxable estate while providing lifetime income.
• Charitable Lead Trusts (CLTs): Provide income to a charity for a set period, after which the remaining assets go to your beneficiaries—often with reduced gift or estate taxes.

These advanced planning tools require guidance from estate attorneys and financial planners but can be highly effective for those with substantial assets.

Strategic Giving Vehicles: Maximizing Impact and Efficiency

To make charitable giving more simplified and tax-efficient, many donors use giving vehicles that offer flexibility, control, and long-term planning opportunities. One of the most popular tools is the Donor-Advised Fund (DAF).

Donor-Advised Funds (DAFs): A Closer Look

A Donor-Advised Fund is a charitable investment account that allows you to:

• Make irrevocable contributions to a public charity that sponsors DAFs
• Receive an immediate tax deduction
• Recommend grants to charities over time, there is no deadline for when the funds must be distributed

How It Works:

1. Contribute: Donate cash, securities, or other appreciated assets to a DAF
2. Invest: Choose from a range of investment options. Growth is tax-free, which can increase the amount available for future giving
3. Grant: You can recommend grants to qualified nonprofits at any time. Grants can be made in your name or anonymously
4. Manage: The DAF sponsor handles administration, compliance, and distribution

Benefits of DAFs:

• Tax Efficiency: Immediate deduction and potential to avoid capital gains.
• Simplicity: One account for multiple donations and charities.
• Flexibility: Take your time choosing causes to support.
• Legacy Planning: Involve family members and create a tradition of giving; DAFs can continue with successor advisors.

Qualified Charitable Distributions (QCDs):

A QCD is a direct transfer of funds from your IRA custodian to a qualified 501(c)(3) charitable organization. It counts toward your Required Minimum Distribution (RMD), but is excluded from your taxable income.

Key Requirements for a QCD

1. Age Requirement: You must be 70½ or older at the time of the distribution
2. Account Type: Must come from a traditional IRA (not a 401(k) or other employer-sponsored plan, unless rolled into an IRA)
3. Annual Limit: Up to $100,000 per person per year (indexed for inflation; as of 2024, it’s $105,000). This applies per taxpayer, not per IRA

How it works:

Let’s say you’re 73, have an RMD of $25,000, and donate $15,000 via a QCD:

• $15,000 of your RMD is satisfied tax-free.
• You only report $10,000 of RMD as taxable income.
• You don’t claim a deduction, but your AGI is lower, which can reduce other taxes.

Tax Benefits of a QCD

• Reduces taxable income: QCDs are excluded from adjusted gross income (AGI), unlike regular charitable deductions
• May reduce taxes on Social Security and Medicare premiums (because AGI is lower)
• Avoids itemization: You benefit even if you don’t itemize deductions

Incorporating Charitable Giving into Your Financial Plan

Strategic charitable giving isn’t just for the wealthy, it’s for anyone looking to align their financial goals with their personal values. Here’s how to start integrating giving into your broader financial strategy:

• Work with a financial advisor to assess the best ways to give based on your income, assets, and goals.
• Review your giving annually, just as you would your investments or insurance coverage.
• Set giving goals: Whether it’s a dollar amount, percentage of income, or types of causes, clarity can help make your giving more impactful.
• Use a giving journal or spreadsheet to track donations and keep receipts for tax time.

Conclusion: Doing Good While Doing Well

Charitable giving is a powerful tool, not just for making a difference in the world, but for enhancing your financial well-being. By understanding the tax advantages, leveraging appreciated assets, planning for your estate, and using vehicles like Donor-Advised Funds, you can amplify the impact of your generosity while benefiting your bottom line.

Smart giving isn’t just about writing a check, it’s about creating a lasting legacy that reflects your values and supports your financial future.

Disclosures:

Not an Offer, Recommendation or Professional Advice: This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact Canter Wealth or consult with the professional advisor of their choosing.

Forward-Looking Statements: Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.