Are You Making Charitable Contributions the Wrong Way? How Successful Investors Maximize Their Giving Impact
Charitable giving is more than just an act of generosity—it’s a thoughtful decision that successful people and long-term investors use to align their wealth with their values.
Did you know that nearly 60% of Americans make charitable contributions each year? However, many are not taking full advantage of strategies that could significantly amplify their impact.
When it comes to giving, everyone’s tax situation is unique, but there are generally some prudent tenets that individuals across all tax brackets can adopt to maximize the effectiveness of their charitable contributions—for both the donor and the recipient. If charitable contributions are part of your annual household budget, understanding these strategies can ensure that your generosity has the greatest benefit possible for the causes you care about.
But First, The Basics of Tax Deductions and Determining if your Charitable Giving is a ‘Write Off’
Charitable giving is encouraged by the IRS because it benefits society as a whole. By incentivizing donations, the tax code aims to promote philanthropic efforts that support non-profits, educational institutions, religious organizations, and other entities that work toward the public good. However, the tax-deductions that benefit the donor only apply to those who itemize their deductions on their tax return. When your itemized deductions—such as mortgage interest, state taxes, and charitable contributions—exceed the standard deduction ($14,600 for single / $29,200 filing jointly in 2024), itemizing can reduce your taxable income and save you more on taxes. The majority of Americans take the standard deduction, which means they do not benefit from itemizing deductions like charitable contributions.
The Strategic Advantage of Donating Appreciated Assets
One of the key strategies is to avoid cash donations and instead consider donating appreciated assets such as stocks, mutual funds, or real estate. Those with investment experience understand that these assets have likely grown significantly in value over time, and donating them can offer a double benefit.
When you donate appreciated assets, you can avoid paying capital gains taxes on the appreciation. This allows you to donate the full market value of the asset to the charity, resulting in a larger gift and a greater tax deduction. For instance, if you purchased stock for $5,000 that is now worth $10,000, donating the stock instead of cashing it out and donating the proceeds allows you to avoid paying capital gains tax on the $5,000 appreciation. The charity receives the full $10,000, and you get a tax deduction for the same amount.
Leveraging Donor-Advised Funds DAFs for Maximum Flexibility
Donor-advised funds (DAFs) are another powerful tool for investors who want to maximize their charitable impact via the ability to ‘bunch’ donations into a single year. This is especially applicable to those who have sold a business, sold real estate, or had a significantly high income year. A DAF is essentially a charitable investment account that allows you to make a contribution, receive an immediate tax deduction, and then recommend grants to your favorite charities over time. This strategy offers flexibility and control over your charitable giving, which is particularly valuable for investors who want to ensure their donations are timed to maximize impact.
One of the key benefits of a DAF is the ability to contribute appreciated assets directly to the fund. By doing so, you take an immediate tax deduction while maintaining the flexibility to decide which charities to support later. Additionally, the funds within a DAF can be invested and grow tax-free over time, increasing the potential impact of your future donations.
The Psychological and Emotional Benefits of Charitable Giving
Beyond the financial advantages, charitable giving provides significant psychological and emotional benefits. Establishing an annual charitable budget not only helps you make giving a regular part of your life but also allows you to experience the deep satisfaction that comes from making a meaningful difference.
For those who have achieved any degree of financial success, giving back can enhance your sense of purpose and align your financial decisions with your personal values. This sense of purpose will inevitably lead to increased well-being, lower stress levels, and a more positive outlook on life.
Charitable giving is a powerful way to make a lasting impact on the world while also reaping significant financial and emotional rewards. By donating appreciated assets instead of cash, utilizing donor-advised funds, and establishing an annual charitable budget, you can maximize the impact of your giving and contribute to the causes you hold closely. As always, we recommend working with your accountant, in partnership with your trusted Bowline advisor, to help navigate the complexities of charitable giving and put together a plan that’s customized for your household.
