Formulating a Charitable Giving Strategy with Tax Efficiency in Mind (Part 1)

by Stephanie Anderson, Manager, Financial Planning and Wealth Management

This is part one of a two-part series. Click here to read Part 2.

For many individuals and families, charitable giving is an important part of helping those in need, giving back to their communities, and building their family’s legacy.  Whatever the reason for giving to charity, in order to maximize the impact of those gifts, it is important to have a clear set of goals for giving and to create a charitable giving plan that seeks to optimize the tax efficiency of designated gifts.

Here we share part 1 of a 2-part article series on charitable giving strategy. In this article we focus on the goals for giving and the framework for a charitable giving plan.  Because tax laws often change, we recommend working with an experienced tax professional or financial advisor to help you to make the best possible choices for your specific financial and tax situation.

Goals for Giving

While tax savings are certainly a consideration in giving, most individuals and families give with a goal of supporting causes about which they are passionate and which reflect their own personal values and those of their family.  A key first step in formulating a charitable giving strategy is to reflect on two questions:  1) what underlying values are motivating you to give? and 2) what objectives are you trying to achieve through your donations?  The answers to these questions will serve as a guide to selecting the types of organizations that will benefit from your support and that will help you to achieve your charitable goals.

Subscribe below to be notified of future blog posts.

When considering these questions, many individuals expand the conversation to include a broad array of family members.   These conversations are a great way to communicate family values to children and grandchildren, while highlighting the importance of philanthropy for the next generation.  Spring break, summer break, and family holidays are great opportunities to begin charitable giving conversations.

Elements of a Charitable Giving Plan

The key elements of a charitable giving framework are:  1) designating specific organizations for support based on your goals for giving; 2) setting a budget for charitable donations; 3) determining the optimal structure for donations; 4) deciding what assets will be donated (e.g., cash, securities, property, etc.), with a focus on timing contributions to optimize the tax efficiency of the gift; and 5) tracking contributions and evaluating the impact of the charitable plan over time.  

Designating specific organizations for support

Individuals who itemize deductions on Schedule A of Form 1040 may deduct charitable contributions to certain qualified organizations. Nonprofits that qualify for Section 501(c)(3) status under the Internal Revenue Code are exempt from federal taxes.  Examples of qualified organizations include:

• Churches, synagogues, mosques, and other religious organizations;
• Most nonprofit charitable organizations (e.g., American Red Cross and the United Way);
• Most educational organizations, colleges, universities, and museums; and
• Nonprofit hospitals and medical research organizations.

Most of the above-listed types of organizations would be designated as public charities by the IRS (relevant for limits on the deductibility of donations discussed below).  You can check whether an organization is qualified to receive tax-deductible contributions by asking the organization directly for supporting documentation or by searching for qualified organizations at www.irs.gov/TEOS.  Contributions made to nonqualified organizations are not deductible for tax purposes.  Please consult your tax professional or financial advisor for additional details.

Setting a budget for charitable donations

The amount of annual donations can be a deeply personal decision which incorporates religious, social, and cultural considerations.   When developing a giving budget, it is helpful to keep in mind the maximum allowable deductions permitted by the IRS each year for charitable contributions.  That maximum amount depends on the type of contribution, your filing status and adjusted gross income (AGI), and the type of organization to which you are donating.  

For example, if you make cash contributions during the year to organizations designated as public charities, your deduction for the contribution is limited to 60% of your AGI.  For cash donations to other charities, the limit is 30% of AGI.  For fair market value donations of appreciated non-cash assets held for more than one year, the maximum deduction is limited to 30% of AGI for public charities and 20% of AGI for other charities.  Charitable donations in excess of annual allowable IRS deductibility limits can be carried forward for up to five subsequent years.   Consulting with a tax professional or financial advisor can be beneficial when setting a budget for charitable donations, especially when sizable donations are planned.

*****

We hope you have found this information helpful as you begin to design your charitable giving strategy. In our upcoming second part of this series, we will discuss the optimal structure for donations by exploring donor-advised funds, private foundations, and qualified charitable distributions.  Additionally, we will look at key considerations when determining which assets to give to charity and the timing of those contributions.  These factors will be considered with an eye to improving tax efficiency and thereby maximizing the after-tax impact of your charitable giving.

Questions about this post? Please complete the form below.