Charitable Giving Strategies: Feel Good and Cut Your Taxes

A red bow is tied around a stack of hundred-dollar bills.

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published 26 November 2023

Millions of people give to charity to support various causes that have had a positive effect on their lives, their loved ones and their communities. According to the National Philanthropic Trust, Americans donated $499.33 billion in 2022.

Individuals formed the largest source of charitable giving, which amounted to $319.04 billion, representing 64% of the overall donations. Other donations included foundation giving, corporate and giving by bequest. Most of the charitable dollars went to religion, followed by education and human services, then grantmaking foundations, while the health sector took the least allocation.

Why should you give to charity?

Adults whose parents donated to charity have a high likelihood of giving. Regardless of COVID-19 and its aftermath, about 86% of affluent families maintained their charitable contributions, according to the National Philanthropic Trust.

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Here are some of the positive effects of donating, beyond helping those in need:

Donating strengthens personal values. People who donate get a boost in their mood and feel that they are following their moral conscience by helping. According to a Charities Aid Foundation survey, 96% of the individuals who gave said that they had a moral duty to help other people, a feeling that is deeply rooted in their principles and values.
Giving to charity empowers communities. Giving enables people to invest in change and make places and spaces look better and more beautiful. It is easy to identify various causes in your immediate environment and support them through charitable giving.
Giving allows your family and friends to learn about generosity. People who see others donating to a good cause are more likely to do the same. Giving to charity reminds people that they need to support others. As they see you give, your family might also start to support the same causes, which nurtures generosity.
Charity can add more meaning to your life. Wealth offers a better standard of living, but you can also use it to build your community and leave a legacy. Giving to charity gives your wealth an enhanced meaning. You get a chance to express yourself, support causes that are important to your life and change the world around you.

Here are six strategies to use when giving to charity.

1. Engage your financial planner.

Before you donate, you need to understand the amount you can give. It is important to include charitable giving in your overall financial plan because it affects cash flow, taxes, investments, retirement and estate planning. A CFP® professional can also help in identifying your charitable and financial goals and help you work toward them. The financial planner can help you evaluate your options and identify the appropriate charitable giving strategies for your personal and financial situation. On a personal note, in July 2023, I earned the CAP® designation Chartered Advisor of Philanthropy to help my clients integrate their philanthropic intent in their financial plans. According to the American College of Financial Services, the CAP® program is a graduate-level program that provides the specialized knowledge and tools you need to help clients articulate and advance their highest aspirations for self, family and society.

2. Research and understand how various charities operate.

A survey done by Fidelity Charitable found that about 67% of donors said they needed to be more certain about a charity’s trustworthiness. Before donating, it is important to look for the most effective charities in sectors such as education, health care, sustainability and gender equality, among others. Websites such as Charity Navigator can show how charities use their donations and highlight their work across the world. You can also use GuideStar to find details about charities before deciding to donate. The information gathered will increase your confidence in a particular charity and empower you to support its mission.

3. Donate appreciated assets.

You can make donations without focusing on cash, and that is through contributing appreciated assets such as stocks directly to a charity. When you donate stocks, you are exempted from paying capital gains tax on stock appreciation, which increases your donation value while lowering your tax.

Cash has a lower tax efficiency and has a high likelihood of reducing your donation value. Almost 47% of the donors told Fidelity Charitable that they would give more if they received a higher tax deduction.

When you file your federal taxes, you must report your stock donation on IRS Form 8283, which is the form for non-cash charitable contributions. You will need to submit this form with your tax return for the year you donated the stock.

Donors also can use donor-advised funds (DAFs) to help them donate their appreciated assets. A DAF is a charitable giving vehicle sponsored by a public charity, and its role is to convert appreciated assets into charitable funds. The benefit of using the DAF program is that you can eliminate the capital gains tax rate of 20% and probably a Medicare surtax, aka IRMAA, that you could have incurred if you sold the stock and then donated the proceeds to the charity.

There are no contribution limits on how much individuals and families can donate to a DAF. Some DAF sponsors may require a minimum initial contribution or a minimum grant amount. Grants do need to be approved by the DAF sponsor. A DAF may also offer the ability for anonymous granting.

4. Divest private interests through a DAF.

Your financial adviser can help you strategize on donating non-publicly traded interests to a charity before divestiture. (Non-publicly traded interests include alternative investments, restricted stock units (RSUs), S corp or C corp shares, limited partnership interests and cryptocurrency, among others.)

For example, suppose you have a family-owned business that you want to divest. In that case, it is better to donate all or a portion of the privately held interests to a charity before divestiture.

You can also consider the bunching strategy where you move several years’ worth of charitable giving to one tax year. In this case, you may not donate anything in the preceding years. Your standard deductions over that multiyear period can be thousands of dollars, which means that you will save more money.

5. Take advantage of high-income years.

If you have experienced a high-income year, it is advisable to take advantage of charitable contributions. Donating to DAFs will help you lower your taxable income. When using a DAF, your contributions can be re-invested, which will allow you to earn tax-free money and have more funds for charity.

6. Consider qualified charitable distributions.

Anyone age 70½ or older can use qualified charitable distributions (QCDs), especially if they hold IRAs. QCDs, also known as IRA charitable rollovers, allow individuals to meet their required minimum distributions (RMDs) by directing up to $100,000 to one or more qualified charities. QCDs don’t raise taxable income, and they can help clients mitigate tax bracket creep and reduce the likelihood of disqualifying you for certain tax deductions or tax credits. Reducing your taxable income also can lower your Medicare premiums and minimize taxes on your Social Security benefits.

Donating to charity helps you to support your causes and make an impact in the community. An intentional approach that integrates financial planning, estate planning and tax planning can support inspiring charitable organizations and create a powerful legacy.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Marguerita M. Cheng is the Chief Executive Officer at Blue Ocean Global Wealth. She is a CFP® professional, a Chartered Retirement Planning Counselor℠ and a Retirement Income Certified Professional. She helps educate the public, policymakers and media about the benefits of competent, ethical financial planning.