DAFs

S5E2: Here’s What Savvy Donors Need to Know About Strategic Charitable Giving

Strategic Charitable Giving Tips for Savvy Donors

Strategic Charitable Giving Ideas to Maximize Your Tax Savings

Cathy shares her strategic charitable giving tips, from deciding how much to give to maximizing your tax savings.

A lot of my clients are charitably inclined and want to include giving in their financial plan. 

Of course, I thoroughly understand my client’s personal finances. Thus, I can provide specific guidance as to how they should think about giving and how to incorporate it into their financial plan.

However, if you’re listening to this podcast episode because you’re also looking for answers to these questions, I can still offer some nuggets of wisdom without knowing the details of your financial life.

In this episode, we’re going to talk about:

  • How much to give to charity
  • Which charities to support with your donations
  • Strategic charitable giving methods to maximize your tax savings.

Naturally, everyone’s goals and personal finances are unique. Therefore, it’s best to consult a financial professional if you have specific questions on this topic.

Nevertheless, I hope this episode gives you a framework for how to think about giving, so you can continue to make an impact while also reaping the associated financial benefits.

Episode Highlights

  • [01:36] How much should you give to charity?

  • [03:17] Which charitable organizations should you support with your donations?

  • [06:52] Who can reap the tax benefits of donating to charity?

  • [07:51] How to use “bunching” to increase your tax savings from charitable giving.

  • [10:06] How donor-advised funds (DAFs) can support your strategic charitable giving goals.

  • [13:04] Why donors who have reached RMD age may want to consider making qualified charitable distributions (QCDs).

  • [15:44] The potential advantages and drawbacks of a charitable gift annuity.  

  • [16:46] Why you may want to consider a charitable remainder trust (CRT).

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Charitable Giving, Part 3: Tax-Smart Ways to Give to Charity (Part 1)

Tax-Smart Ways to Give to Charity

If you’ve read the first two articles in this blog series, perhaps you’ve put some thought into how much you want to give to charity each year and to whom. In the second half of this series, we’ll discuss tax-smart ways to give to charity. Tax laws can be dense, so bear with me as I explain the strategies as clearly as possible!

The first thing to know about charitable giving and taxes is that you must itemize on Schedule A of Form 1040 to deduct your charitable donations for the year.

Your total itemized deductions must exceed the standard deduction for you to reap the tax benefit of giving to charity. In 2023, the standard deduction is $13,850 for single filers and married couples filing separately, $27,700 for joint filers, and $20,800 for heads of household.

Fortunately, if you typically take the standard deduction and the amount you give to charity each year doesn’t push you over the threshold to itemize, there are strategies you can employ to maximize your tax savings.

To maximize your tax savings, consider the following tax-smart ways to give to charity:

#1: Bunching

Suppose you’re a non-itemizer but get close to the standard deduction because you max out the State and Local Tax (SALT) deduction at $10,000. Then, you may want to consider a strategy referred to as “bunching.”

How Bunching Works

Bunching is a tax-smart way to give to charity where taxpayers combine or “bunch” their charitable donations into one tax year so they can itemize their deductions.  

Suppose a single taxpayer usually gives $3,000 to charity annually. Meanwhile, their other qualifying itemized deductions (such as state and local taxes, mortgage interest, and medical expenses) amount to $10,000 for a total of $13,000 in deductions.

Thus, it would make sense for this taxpayer to take the standard deduction of $13,850 and not itemize. But let’s say instead they give two years of their charitable budget, or $6,000, in one year.

In this case, they would itemize since their total deductions ($16,000) exceed the standard deduction. If this person is in the 24% tax bracket, their tax savings from charitable donations would be $516 for the year.

This strategy or something similar can be repeated over time, creating multi-year tax savings.

#2: Donor-Advised Funds as a Tax-Smart Way to Give to Charity

In the above example, we assumed the taxpayer wrote a total of $6,000 in checks and mailed them to their preferred charities in one year. Then, they skipped donating to charity in year two.

But there are other tax-smart ways to give to charity that can be even more financially advantageous than bunching and allow for giving each year. One example is to utilize a donor-advised fund (DAF).  

How DAFs Work

A DAF is a registered 501(c)(3) organization that can accept cash donations, appreciated securities, and other non-cash assets. Thus, if you hold highly appreciated securities in a taxable investment account, you may benefit greatly from donating to a DAF.

Here’s why. Suppose instead of writing checks for $6,000 to various charities, the same taxpayer in the example above transfers $12,000 worth of Apple (AAPL) stock with a cost basis of $35/share into a DAF. The stock is worth $160/share on the day of the donation.

The taxpayer can take a tax deduction of $12,000 (the current market value of the shares they donate) on that year’s tax return. They also avoid paying the capital gains taxes they would have incurred by selling the stock outright. This amounts to a savings of over $1,400 ($9,375 gain x 15% long-term capital gains tax rate).

Once they donate their shares to a DAF, the fund sponsor can sell the shares tax-free. The taxpayer can then invest the proceeds within the DAF and let the funds grow tax-free over time. In addition, they can designate which charities they want to receive grants from the DAF going forward.

Like bunching, donating to a DAF allows you to take a potentially large tax deduction in the year you make the donation. Yet unlike bunching, you don’t have to decide which charities to donate to right away. Instead, you can donate your $3,000 as planned each year from funds in your DAF.

Key Advantages of DAFs

  • Flexibility: Donors can recommend distributions to multiple charities over time without having to manage individual grants to each organization.
  • Tax benefits: Donors can claim an immediate tax deduction for the full amount of their donation, subject to certain limitations.
  • Investment management: DAFs typically offer a range of investment options and professional management services to help grow the value of the donations.
  • Privacy: Donors can choose to remain anonymous when making recommendations for grants, if desired.
  • Legacy: DAFs can provide a way for donors to involve their family in philanthropy and pass down charitable values and traditions to future generations.

Limitations of DAFs

Keep in mind that DAFs are not free. According to a 2021 study by National Philanthropic Trust, the average total fee for DAFs was 0.96% of assets per year. This fee includes administrative fees, investment management fees, and any other fees the DAF provider charges.

In addition, DAFs come with a number of rules, including minimum balance requirements, minimum grant requirements, deadlines, and grant approvals.

Many DAF providers require a minimum initial contribution ranging from $1,000 to as much as $25,000. Once you establish the fund, there’s typically a minimum balance requirement between $5,000 and $25,000. If you fail to meet these minimums, the provider may change additional fees or penalties.

In addition, some DAF providers may have minimum grant requirements ranging from $50 to $250 or more. And because most people actively grant at the end of the year, there may be deadlines for making grants to ensure timely processing.

Lastly, DAF providers must approve grants before disbursement to ensure the recipient is an eligible charitable organization and that the grant doesn’t violate IRS rules or regulations. However, disapproval of a grant is rare.

Despite these limitations, the potential benefits make DAFs a tax-smart way to give to charity worth considering in many cases.

Popular DAF Providers

While there are many donor-advised funds (DAFs) in the United States, the most popular providers tend to be large financial institutions and nonprofit organizations. Examples include:

  1. Fidelity Charitable: Fidelity Charitable is the largest DAF provider in the US, with over $35 billion in assets and more than 200,000 donor-advised funds.
  2. Schwab Charitable: Schwab Charitable is the second-largest DAF provider in the US, with over $20 billion in assets and more than 180,000 donor-advised funds.
  3. Vanguard Charitable: Vanguard Charitable is a DAF provider affiliated with the investment firm Vanguard, with over $14 billion in assets and more than 80,000 donor-advised funds.
  4. National Philanthropic Trust: National Philanthropic Trust is a nonprofit organization that offers DAFs and other philanthropic services, with over $8 billion in assets and more than 18,000 donor-advised funds.
  5. Silicon Valley Community Foundation: Silicon Valley Community Foundation is a community foundation that offers DAFs and other charitable services to donors in the Silicon Valley region and beyond, with over $13 billion in assets and more than 4,000 donor-advised funds.
  6. DonorsTrust: DonorsTrust is a nonprofit organization that offers DAFs and other philanthropic services to donors who prioritize limited government, personal responsibility, and free enterprise.

It’s worth noting that there are many other DAF providers in the US, and your choice of provider will depend on your specific philanthropic goals and financial situation. You must do your due diligence to understand the fees, rules, and requirements if you’re considering this tax-smart way to give to charity.

Next: Tax-Smart Ways to Give to Charity Part 2

Hopefully you now have a better understanding of why bunching and DAFs can be tax-smart ways to give to charity. In the final article of this blog series, I’ll share a few more giving strategies that can help you maximize your impact and tax savings.

In the meantime, please visit our Resources page for more information on this topic and beyond.

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