Working as hard as you have throughout your life has allowed you to make sure you and your family are well taken care of, now and in the future. You’ve planned and strategized to get to where you are, and you’re aware of the fact that your resources have now put you in a privileged position. You probably feel the responsibility which comes with that privilege.
Over the course of your career, you’ve certainly given to causes and charities, but maybe you haven’t done so with a whole lot of direction. A common approach to charitable giving is to donate to a select few causes that may approach you asking for a donation towards the end of the year. Often, this is done with little foresight or intention. It may be time to consider aligning your overall financial plan with a more cohesive and forward-thinking philanthropic strategy.
Philanthropic financial planning goes beyond giving to a random smattering of charities or nonprofits every year. It is a strategic approach that aims to align your values, goals, and financial resources to make a meaningful impact, while deliberately preserving your resources for a legacy of giving.
In this article, we’ll help you define your overarching purpose when it comes to charitable giving. This is the first step toward crafting a values-based wealth management plan that’s equally mindful of tax implications and the causes that you so dearly care about so that you can give more and save more.
Getting Starting with Charitable Giving
What is philanthropic financial planning?
Philanthropic financial planning is a means of incorporating and organizing your charitable contributions into your financial plan in a way that aligns with your overall financial goals.
How do I develop a plan for my charitable donations?
Reflect on what causes mean the most to you and research related charities. Be sure the organizations you consider are transparent and efficient with the contributions they receive.
Work with a financial planner to incorporate your charitable giving goals into your financial plan.
What financial strategies can I employ in my charitable giving plan?
A Donor-Advised Fund allows you to make charitable contributions now and decide when and to whom they should be distributed at a later date.
You can make tax-free contributions straight from your IRA or leverage your retirement account by naming your chosen charity as beneficiary.
Donate appreciated assets from stocks and bonds or set up monthly direct donations.
Itemize your deductions and get receipts for contributions greater than $250.
What is Philanthropic Financial Planning?
A philanthropic financial plan helps you figure out the smartest, most impactful ways to give back to causes you care about, while also keeping an eye on how it affects your taxes and overall financial health. There are various ways to execute a philanthropic plan: you could set up an endowment, start your own charity, or contribute to a donor-advised fund, among other options. Deciding which option is right for you is going to vary depending on your preferences for flexibility, your ability to absorb administrative costs, and how much you would like to donate over the years.
To make the biggest impact, you’ll want to work with your professional team – your financial advisor, attorney, and CPA – so that they can help you craft a clear mission statement for your giving. By working with them to integrate a strategy of giving into your larger financial plan, you give yourself the greatest opportunity to express your gratitude and empathy for the communities and causes you value most.
4 Steps To Create A Charitable Giving Plan
- Discover Your Philanthropic Passion: Think about what kind of legacy you want to leave behind. Reflect on what truly matters to you – your life experiences, the people and communities you care about, and the issues that resonate with you the strongest. With a clear vision in mind, take a look back at your past donations for areas you may have overlooked. Try to get an idea of the true impact your past contributions have made and consider if there’s room to improve.
- Find Your Perfect Match: Match your passion with your purpose. Ask questions, do your research, and choose organizations that truly embody the change you want to be part of making. Explore online databases like CharityWatch for charities or nonprofits that align with your mission. Dig into the organizations’ financials, mission statements, and discern whether your donations are in good hands.
- Blend Giving Into Your Financial Future: Incorporate your charitable giving into your financial plan. Think long-term sustainability. Whether it’s setting up a multi-year giving plan or establishing a charitable foundation, make sure your impact lasts. Work with financial advisors to balance your giving goals with your personal finances. Consider tax implications and explore ways to maximize the impact of your donations. Every dollar counts.
- Take the Leap: Now that your plan is in place, it’s time to get moving. Educate yourself, get involved, and “be the change.” Whether it’s volunteering your time, leveraging your talents, or allocating financial resources, it’s action that makes the real difference.
Consider These Charitable Giving Strategies
Donor-Advised Funds (DAFs)
A DAF is a charitable fund managed by a third-party organization. Instead of directly donating to charities, you contribute to your DAF which distributes funds to chosen charities at your discretion. The benefits of DAFs include immediate tax deductions for contributions, potential investment growth, streamlined philanthropy through consolidated management, and flexibility in distributing funds to various charitable causes. It’s important to note, however, that DAFs aren’t legally required to distribute funds within a specific timeframe, so how and when your donations get used is out of your control and can potentially delay its impact.
Qualified Charitable Distributions (QCDs)
QCDs enable individuals aged 70½ or older to make tax-free distributions from their Individual Retirement Accounts (IRAs) directly to qualified charities. Not only do QCDs avoid taxation as income, but they also count towards fulfilling your required minimum distributions (RMDs). This strategy allows you to reduce your taxable income while claiming the standard deduction, and meeting your RMD obligations without inflating your taxable income.
Leveraging Retirement Accounts
Listing charitable organizations as beneficiaries on your retirement accounts offers your estate and beneficiaries significant tax advantages, and it’s as easy as filling out a beneficiary form. In order to streamline the tracking and management of your donations, you can establish a separate retirement account exclusively dedicated to charitable donations. This approach to charitable giving is an effective way to manage your tax liabilities.
Donating Appreciated Assets
Gifting appreciated assets, such as stocks and bonds, to charitable organizations allows you to avoid capital gains taxes while claiming tax deductions for the assets’ fair market value. Various other assets, including real estate and life insurance policies, can also be donated, with any unused deductions carried forward for up to five years.
Set Up Automatic Monthly Donations
Ongoing monthly donations are highly impactful, to charitable organizations and to you. Charities benefit from consistent contributions, enhanced donor retention, and the opportunity to showcase the tangible impact of your donations. Work with your financial advisor to figure out an amount that makes sense with your overall strategy. Monthly giving fosters deeper connections between you and the organizations you support, empowering you to witness firsthand the positive difference your contributions make.
Important Tax Benefits To Remember
When it comes to charitable giving, understanding the tax implications can allow you to give more and save more at the same time. Make sure to keep thorough records of what you donate to stay on the right side of the IRS. If you want to claim a tax deduction for a certain year, you’ve got to make your donation by the end of that year. Be sure to keep an eye on when your donations actually go through, whether you’re writing a check, using your credit card, or transferring stocks – if you don’t get it in before the deadline, you can’t claim it for that year.
- Itemize deductions: To claim tax-deductible donations, you typically need to itemize your deductions on your tax return. Currently, roughly 70% of people use the standard deduction and may not take full advantage of the available tax benefits of their charitable contributions. It’s important to work with your financial planner and CPA to donate in a tax-smart manner.
- Get a receipt for donations greater than $250: To claim a deduction, the IRS requires a written receipt from the charity detailing the amount contributed, any goods or services received in exchange, and an estimate of their value.
- Don’t miss out on tax deductions for volunteering: While you can’t deduct the value of your time spent volunteering, you can claim tax deductions for related expenses, such as mileage driven to volunteer sites, so long as they’re not reimbursed.
Final Thoughts
Winston Churchill said, “We make a living by what we get, but we make a life by what we give.”
In the end, charitable giving is about expressing gratitude, shaping communities, and passing down your values to future generations, and its impact enriches countless lives, including your own.
By understanding the tax benefits of your charitable giving and staying organized with documentation, you can maximize the impact of your donations while staying in compliance with IRS requirements. Seeking the guidance of financial planners is invaluable in structuring a philanthropic financial plan that reflects your values and leaves a lasting legacy of positivity, empathy, and generosity.
At SK Wealth, our financial planners are all about helping you develop a financial plan through thoughtful, informed decisions based on your personal values and goals. We’ve honed our financial planning process, The Integrated Financial Advantage™, over the past 25 years to offer you our personalized recommendations that empower you to live life with intention, tomorrow and today.
