Feeling Charitable? A Strategic Approach Can Help Your Gifts Go Further

BY: Jordon Geiger


According to an annual study of philanthropy, the overwhelming majority of business owners, executives, and affluent households – nearly 90 percent – choose to make charitable giving part of their overall wealth management strategy.

Many report that after spending a lifetime accumulating wealth, they want their efforts to share that wealth to mean something. Their contributions are often tied to a personal experience or include an emotional attachment.

But what if you could give more?

If you are already making regular contributions to a cause and/or plan to initiate a large gift in the near future, we recommend having a conversation with your wealth advisor. By approaching your charitable giving strategically, you can make your money go further to create a bigger impact.

5 Tips for More Strategic Giving

To accomplish your financial goals, people use a variety of different vehicles for saving and investing, such as creating deposit accounts (checking/saving), opening retirement accounts, and diversifying with non-retirement investments. These different vehicles are often referred to as “buckets.”

Depending on the bucket you use to make your donation, your gift could expose you to additional taxes. Instead, consider some of the following strategies to minimize your tax burden and pass along those savings to provide a larger gift for your chosen cause:

  1. Donate appreciated assets instead of cash. Sometimes people will identify an asset, like a stock, as a source of “extra” money they could donate. If an asset appreciates, you have to pay taxes on the gains when you sell it. Typically, people will sell a stock, pay the taxes on the sale, and then donate the remainder. Instead, consider donating the asset directly to charity. Due to their non-profit status, a charity can sell the stock without any tax and keep the entire amount as the donation, increasing the impact of your gift. For example, I had a client who wanted to make a large donation to a local non-profit organization. The client had a highly appreciated asset valued at $60,000, their cost basis of only $10,000 exposed them to $50,000 in capital gains.  These gains are taxable.  The client budgeted a $40,000 gift, but by making a donation of this asset, they were able to bypass the taxable amount by donating the asset to a charity that was able to sell the asset and bypass the tax on the sale.  The donation was then $60,000 not the anticipated $40,000.
  2. Make a qualified charitable distribution from a retirement account. Once you reach age 72, the government requires you to start taking money out of your IRA account. It is called a required minimum distribution. If you don’t need that income yet but would like to maintain the account and let it continue to grow, you could make a direct distribution to charity instead. Since you pay tax on IRA distributions when you take the disbursement, you can make a larger impact with your gift if you “remove the middleman” and the money bypasses you altogether to go straight to charity.
  3. Bundle an annual donation to take advantage of itemized deductions. The standard deduction for 2022 is $25,900 for married couples ($12,950 for single), which means that most people will not exceed that amount to enable itemized deductions. However, some people provide a large annual donation that could be combined – often called bunching – into a larger donation that occurs less frequently. For example, let’s say you donate $10,000 per year toward cancer research or to your church. By bundling your long-term donation commitment into one $30,000 payment every three years, you can save on taxes by using the itemized deduction.
  4. Contribute to a donor-advised fund. Organizations like the Madison Community Foundation have donor-advised funds where donations can be held until you are ready to disburse. For example, perhaps you know you want to donate to a general cause but aren’t sure which specific charity you want to support yet. You can write a check – or multiple checks over several years – and let that money accumulate until you are ready to make the donation. In this case, the money is already designated for charity, so you can take the deduction at the time you write each check rather than at the time the funds are distributed.
  5. Offset tax costs of a Roth IRA conversion. As a reminder, a traditional IRA is tax deferred, meaning you don’t pay taxes until the money comes out. In contrast, money contributed to a Roth IRA gets taxed going in so that you don’t have to pay when it comes out down the road. For most people, there is a big benefit to putting your money into a Roth IRA, but there is a limit to how much you can make in income in order to open a Roth. That said, some people will pay to convert their IRA to a Roth IRA after retirement when income decreases. If philanthropy is already part of your financial planning, then you could consider making a larger donation during the same tax year that you convert an IRA to a Roth IRA in order to offset some of the taxes on the income from that conversion.

Talk to Your Advisor

If you already have a philanthropic goal in mind, talk to me or any of our wealth management advisors. Your approach to giving can make a difference to the causes you support and to your overall financial situation. By using gifting strategies that provide intentionality to your planned giving, you can often free up additional funds to make a larger impact for those in need.

Author:

Jordon Geiger

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