A Comprehensive Guide to Charitable Gifting

We’ve seen countless studies that show us how giving money away brings happiness. In fact, we think about this a lot with our clients who have just experienced fabulous liquidity events and find themselves in an entirely new financial situation. There are so many things to think about: paying a large tax bill, potentially buying a new home, quitting the workforce or changing careers, and of course using that fabulous influx of cash to make the world a better place. Not only can a donation of cash, or even stock, help a charity in need, but there are certain tax benefits available to the donee.

At Brooklyn FI, we talk with our clients about the things they are passionate about and help create a gifting strategy. If we can help save a few bucks on your tax return, we’ll suggest the best gifting strategy during each unique tax year.

Check out our previous post called “I’m Rich, Now What.”

Mark and John recently had a chat about the different strategies available and why some might be better for you. Watch the webinar recording or read our basic summary here.

Where shall we begin? ( I stole this phrase from Esther Perel’s amazing podcast about relationships)

We always like to start with goals. What are you trying to accomplish with this donation?

  • Ways to think about charitable gifting:

    • Percentage of income

    • Annual Dollar Amount

    • Specific goal or cause (i.e. build a $15,000 shed at the little league field)

  • The lowest earners are the second most charitable, second only to the top 0.1% of earners.

  • Goals should drive the gifting and tax conversation

Once you’ve set your goals for the year, it’s time to think about the potential tax savings. Recent changes in the tax code allow for a $300 deductible charitable contribution for any taxpayer. Above that, whether your charitable contribution is actually tax-deductible depends on many different factors relating to whether you itemize your deductions on your tax return, OR like MOST people, you take the standard deduction.

Here are two examples to show how contribution may or may not be deductible.

Example 1: Sally and Jim have $10,000 in property taxes and $17,000 in mortgage interest. They are in the 37% tax bracket. Their itemized deductions are $27,000 before charitable gifts. Their standard deduction is $25,100. They’ll itemize and every $1 to charity will save them 37 cents in taxes.

Example 2: Mike and Jordan have $10,000 in income taxes and no mortgage. Mike is in med school and Jordan works in tech, so they’re in the 24% tax bracket. Their itemized deductions are $10,000 before charitable contributions, and their standard deduction is $25,100. For the first $15,100 they give to charity, they won’t save in taxes. Above that, they’ll save 24 cents for each $1 they give to charity.

Okay, now we understand HOW the tax deduction works, let’s talk about the different ways to gift.

Ways to Give - Partial Interest Charitable Transfers

Charitable Lead Trust

  • Money to charity for a period of time, remainder to beneficiaries

  • Charitable Remainder Trust

    • Income to the beneficiary (person) up to 20-years, 

remainder to charity

  • Donor Advised Funds (DAFs)

    • Tax Deduction NOW

    • Hand out to charities later

Ways to Give - Donor Advised Fund

A great strategy to maximize the tax deduction in one year, i.e. if you plan to give $10,000 every year for the next 5 years, stack those contributions in a tax year where the deduction is most valuable (like when you have a liquidity event)

  • A charitable donation is made to a holding account where the funds are then invested in the stock market to be given out at a later date

  • Best for folks who don’t have time to decide where their gifts would be most meaningful

Ways to Give - Donating Appreciated Securities 

Avoid capital gains taxes and increase your gift - a great strategy for our clients with a concentrated stock position.  

  • Use low basis stock to give back to your chosen cause instead of paying long term capital gains taxes 

  • Works for publicly traded companies

  • You can use this strategy within your Donor Advised Fund

 
 
AJ Grossan