How To Create a Charitable Giving Strategy

Charitable Giving

These days, requests for charitable donations are a year-round occurrence. Whether it’s giving money after a natural disaster, a request from your alma mater, or simply being asked whether you want to “round up” at the checkout line, there are endless opportunities to give. 

The end of the year is an especially good time to think about your charitable giving strategy to ensure your donations make the biggest impact, both to the organization and to yourself. 

Whether you’re a regular giver or just beginning to think about integrating charitable giving into your finances, having an informed plan will ensure, as Benjamin Franklin said, that you can “do well by doing good.”

An effective charitable giving strategy has three main components, which we’ll cover today. 

 

#1 – Types of Assets to Donate

Cash

For small charitable gifts, writing a check or donating via credit card is certainly a popular and easy option. Documentation for cash gifts, no matter how small, is key. Make sure you keep donation receipts, canceled checks, or credit card statements as proof of your gift.

It’s also important to remember that you may not receive a dollar-for-dollar tax deduction for your cash gifts in a given year. Deductions for cash donations are limited to 60% of your adjusted gross income (AGI) in a single tax year, with any contributions above these limits carried forward for up to five years.  

In 2020 and 2021, the CARES Act encouraged donations to charitable organizations by giving all taxpayers a $300 (single filer) or $600 (married filing jointly) deduction for cash gifts. It’s important to be aware that this deduction was not extended to 2022.

 

Appreciated Investments

Despite the stock market’s volatility in 2022, many people still have appreciated holdings, such as stocks, mutual funds or exchange traded funds, in their portfolio. Shares that have been held more than one year can be donated directly to a charity. 

The benefit of this type of donation is twofold: 

  • Rather than having to sell appreciated investments to generate cash to donate, which would result in paying tax on capital gains, the shares can be directly transferred to a charity. 
  • The organization receives the market value of the shares as a donation and can subsequently sell the investments tax-free because of its non-profit status. 

Donations of investments are generally deductible up to fair market value, but it’s important to remember that current deductions are capped at 30% of AGI, with a 5-year carryforward. 

 

Tangible Personal Property

Many organizations gladly accept used items such as clothing, furniture, or even vehicles, as long as they are considered to be in “good” condition under IRS rules. Most used household items, such as those donated to Goodwill or Salvation Army, should be valued at “thrift store prices” when determining an appropriate deduction amount. 

Items donated over the course of a year worth more than $250 but less than $500 should be documented and include the name and address of the organization, a description of the items donated, the original cost, and current fair market value of the items donated. 

Donations exceeding $500 fair market value up to $5,000 need to be documented on IRS Form 8283, which asks for more detailed information on the item’s condition, acquisition cost, and methodology for calculating the fair market value. Donations exceeding $5,000 in value require all the items listed above, in addition to an appraisal by a qualified appraiser. 

 

#2 – Tax Benefits of Giving

For some, the tax benefit received from making charitable contributions is secondary to supporting organizations doing meaningful work. For others, reducing tax liability in a given year is the primary motivating factor. 

Regardless of where you fall, being aware of current laws and adjusting your charitable giving strategy appropriately can lead to some meaningful tax savings. 

 

Standard Deduction Versus Itemizing 

One of the biggest tax considerations when it comes to charitable giving is whether you take the standard deduction or itemize. The Tax Cuts & Jobs Act of 2017 nearly doubled the standard deduction and reduced or eliminated a lot of tax deduction items. 

The standard deduction for single or head of household taxpayers in 2022 is $12,950. A married couple needs over $25,900 in deductions in order to itemize in 2022.

How does this relate to your charitable giving? Think of the standard deduction as the “hurdle” your deductions must overcome to realize any additional tax savings specifically from charitable giving. If your charitable giving plus other deductions don’t exceed the standard deduction, you are receiving the same tax benefit as if you had not donated anything to charity for the year.

 

Donor Advised Funds

Because of the high standard deduction, the popularity of Donor Advised Funds has skyrocketed in recent years. A Donor Advised Fund (DAF) is an account established specifically for charitable giving and can be opened with big brokerage firms like Schwab and Fidelity at very low annual costs. 

Contributions to DAFs can be made with cash.  A more beneficial strategy from a tax perspective, however, is funding a DAF with appreciated securities like stocks or mutual funds, real estate, crypto currencies, or even privately held businesses. 

The tax deduction for the contribution to the DAF is received in the year the contribution is made, and gifts to charitable organizations can then be spread out over subsequent years. 

For those looking to turbocharge their tax deductions, consider  a “bunching” strategy.   Several years of charitable contributions are made in a single tax year–enough to exceed the standard deduction–and charitable gifts are spread out over several years. 

 

Qualified Charitable Distributions

Qualified Charitable Distributions, or QCDs, are a great option for individuals with Individual Retirement Accounts (IRAs) who are 70.5 or older to give to charity and save on taxes.

Donations can be made directly from IRA accounts and the amount withdrawn is not subject to tax, as with regular IRA withdrawals. For those who have reached age 72 and are subject to annual required minimum distributions, a QCD will count towards the RMD, again reducing the tax that would be paid otherwise.

The maximum amount that can be given to charity in a year via a QCD is $100,000 and it’s important to still keep detailed records for tax purposes. 

 

#3 -Values Behind Your Giving

Beyond the technical aspects of giving, one of the most important considerations to any charitable giving plan is a thorough understanding of your personal values and goals. 

Start by taking a step back and contemplating what motivates you to give – is it the “warm-glow” you feel when making a donation, concerns for the benefit of others or causes, or some combination of the two?

Thinking through these factors can help you make rational giving decisions, make impactful gifts, and have a thought-out response when solicited for support. 

 

We’re Here to Help

If you are ready to start thinking about a charitable giving plan, or need guidance on adjusting your current plan, please reach out. We’re here to help. 

Uplevel Wealth is a fee-only, fiduciary wealth management firm serving clients in Portland, OR and virtually throughout the U.S. 

Five Ways to Uplevel Your End-of-Year Finances

End of Year To-Do's

Visit any Costco or Target (two of our favorites!) and you’ll see that fall is officially over and the holiday season is upon us. Not to despair, however. With a solid nine weeks left in 2021, now’s a great time to run through some important “to-do’s” and finish the year with your finances in good order.

To keep things easy, we broke it into our top five categories:

 

Be Mindful of Deadlines Ahead

With only a few pay periods remaining in 2021, make sure you’re on track to maximize your retirement plan contributions, especially if your employer offers a match. You can contribute up to $19,500 this calendar year to a 401(k) or 403(b), plus an additional $6,500 if you’re over age 50. 

If you want to increase contributions before the December 31st deadline, reach out to your HR department or payroll provider ASAP. It’s also a great opportunity to get next year’s contributions set up, as the maximum contribution amount jumps to $20,500 in 2022, for a total of $27,000 if you’re over 50. 

 

Use It or Lose It

A Flexible Spending Account (FSA) or Dependent Care FSA allows you to save pre-tax dollars throughout the year and use those funds to reimburse yourself for out-of-pocket expenses like copays, prescriptions, or child care expenses. While these accounts are a great way to save on taxes, typical FSA accounts have a “use it or lose it” provision whereby the balance in the account needs to be depleted by the end of the year. 

Employers do have the discretion to offer wiggle room and allow for some money to be carried over, usually $550. Due to the pandemic, the government is giving employers even more leeway, allowing for deadline extensions and larger balance carryforwards, including up to the total balance in an FSA. 

Be sure to find out what deadlines and limits apply to your plan, as you may want to contribute less money next year if you can carry-over an existing balance. If not, now’s the time to use up remaining funds and schedule doctor visits or stock up on FSA-eligible items, a handy list of which can be found here

 

Tax Planning Isn’t Just for April

While impending tax changes have been rumored since President Biden took office (check out our past blog posts on proposed tax changes) nothing has officially passed as of this post. Despite the uncertainty, it’s still a good idea to take a look at your income and deductions in 2021 and how they might compare to 2022 and beyond. 

If you were part of 2021’s Great Resignation and left your job, a Roth conversion in a lower-income year could be of great benefit. Conversely, if you were fortunate enough to receive a significant windfall, such as Restricted Stock Units (RSUs) vesting, other stock options, or a large bonus, make sure you are paying enough in estimated tax payments to avoid penalties come tax time. 

 

Double Check Your Portfolio

Though stocks have been on a winning streak for the last year or more, it’s worth taking a peek at your portfolio to see if any holdings are currently at a loss. Those investments can be sold and their losses used to offset capital gains realized this tax year or carried forward to a future tax year until depleted. 

If you don’t already have capital gains, you can offset up to $3,000 in ordinary income with realized capital losses. A word of caution however – be sure to familiarize yourself with wash sale rules before repurchasing a security sold at a loss, or you may find yourself in a bit of hot water with the IRS.

 

Make a Difference

Helping friends and family or supporting beloved charitable organizations can happen any time during the year, but there are some timing considerations if you’re looking to maximize your giving. 

This year, you can give up to $15,000 to another individual without making a dent in your lifetime estate and gift exclusion. If you are married and file jointly, that amount doubles to $30,000. Limits for 2022 have yet to be announced, but there is speculation that this amount will increase to $16,000 for single tax filers and $32,000 for married couples. 

Giving to charities has its own set of financial benefits and strategies vary depending on your circumstances. If you find a bit of excess cash in your bank account, here are a few options to consider:

  • Cash donations – Congress extended a provision of the CARES Act that gives single taxpayers a deduction of up to $300 for cash donations to some charities and $600 for married filing jointly. This applies even if you claim the standard deduction.
  • Strategic Donations – In addition to outright cash contributions, there are other options available such as donating appreciated stock, funding a donor advised fund, or a qualified charitable distribution (for those ages 70.5 or older). We can help determine which option is best for you. 

 

Reach Out

In the coming weeks, as you trade Pumpkin Spice Lattes for Peppermint Mochas, don’t forget to take a few moments to check-in on your financial position to make sure you’re taking full advantage of all the options available to you. We’re here to help.