This article is the first in a four-part blog series focused on charitable giving and will address the question: How much should you give to charity?
There’s a great need for charitable donations from private sources these days, and with those donations, the world can be a better place. If you have a desire to donate money but aren’t sure how much, to whom, when, and how to benefit from applicable tax laws, this blog series is for you.
How Much to Give to Charity Each Year
As a financial planner, clients often ask me for my recommendation on how much they should donate to charities each year. Because I understand my clients’ financial situation thoroughly, this is not an unusual question. I can provide a suggestion based on their cash flow or tax situation.
But with something as personal and individual as charitable giving, I prefer they determine the amount themselves.
What I’ve found helpful in guiding clients is sharing statistics on how much others give to charity. And as it turns out, there’s a psychological explanation as to why this is helpful.
It’s called “informational social influence,” and it occurs when people do not know the correct (or best) action to take. Instead, they look to the behavior of others as an important source of information and act accordingly.
How Much Do Others Give to Charity?
Americans are charitable, donating hundreds of billions of dollars annually to needy organizations. Although there are significant differences in how much Americans give, higher-income households tend to give a higher proportion of their income to charity than lower-income households (unsurprisingly). However, demographic factors, such as age, education, race, and geography, also come into play.
According to data from Giving USA Foundation, the average individual donation among all income levels in 2020 was 2.5% of income. But individual households earning over $200,000 per year gave a more significant percentage—on average, 4.5%.
According to the same report, households in the Northeast and Upper Midwest gave, on average, 3% to 4% of their income to charity. Meanwhile, households on the West Coast gave approximately 1% to 2% of their income to charity.
Of course, these are averages, and the actual percentages of income people in these regions donate depend upon many factors.
How Tax Deductions Impact Charitable Giving
Once I become familiar with my clients’ charitable giving goals, I include the discussion of “how much” in my annual tax planning meetings.
Why? Because the tax code provides incentives for individuals to make charitable donations by allowing them to deduct these gifts from their taxable income. Indeed, if you’re charitably inclined, you may be able to meaningfully reduce your tax burden each year.
Of course, there are rules and guidelines as to who can deduct such donations and to what extent. I will expand on these nuances later in this blog series.
In the meantime, I hope you find this information useful in determining how much you’d like to give to charity each year. Please check out our other resources for additional details on this topic and stay tuned for more.
