Here Are 6 Moves You Should Make Before Giving Money to Charity
Written by
Cindy Lamothe
Edited by
Amber Barkley
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Giving back is one of the great joys of achieving financial freedom. Nothing is more fulfilling than having the privilege to donate to one’s favorite charities. It’s something anyone — who has the means to do so — should heartily embrace.
But before you do, experts recommend being strategic. For one, each type of donation carries different implications. Read below to learn more about which money moves to make before giving to charity.
Evaluate the Type of Gift: Cash vs Other Assets
When it comes to charitable giving, according to Dennis Shirshikov, head of growth at GoSummer, the type of gift you choose can significantly impact both the charity and your tax situation.
“Cash donations are straightforward and allow for an immediate deduction, but donating appreciated assets, such as stocks, can provide additional benefits,” he said. “For example, donating appreciated stocks not only allows you to avoid paying capital gains tax but also lets you deduct the fair market value of the asset.”
Nischay Rawal, certified public accountant and founder of NR Tax & Consulting, agreed. “I’ve seen how strategic charitable giving can maximize your tax benefits.”
“First, consider donating appreciated assets like stocks instead of cash,” he advised. “This strategy allows you to avoid capital gains taxes while claiming a deduction for the full market value. For example, if you donate stocks that have appreciated over time, you bypass the capital gains tax and can claim a higher deduction, making it a win-win for you and the charity.”
Consider the Amount and Timing
“The amount and timing of your gift can also play crucial roles,” said Shirshikov.
He explained that bunching your charitable contributions into a single year can help you exceed the standard deduction threshold and itemize deductions, maximizing your tax benefits. “For instance, if you typically donate $5,000 annually, consider donating $15,000 every three years instead.”
Justin Godur, finance advisor and founder of Capital Max, agreed that the amount you choose to give should align with your financial goals and tax planning strategies.
“Large donations might push you into a higher deduction bracket, but it’s crucial to balance generosity with your financial stability,” he observed. “I always advise calculating the optimal amount that maximizes your tax benefits without straining your finances.”
Godur also agreed that timing is another critical factor. “Donating at the end of the year can help you achieve immediate tax deductions, but consider your overall tax strategy,” he said. “Sometimes, spreading your donations over multiple years can offer more consistent tax relief.”
Utilize Donor-Advised Funds
For high-net-worth individuals, Godur said establishing a donor-advised fund allows you to donate now and decide on the specific charities later, securing current-year tax benefits while maintaining flexibility.
“Donor-advised funds (DAFs) offer a flexible and tax-efficient way to manage charitable donations,” Shirshikov added.
He said this strategy is particularly useful for those who experience a windfall or high-income year.
Assess the Charitable Organization’s Status
Before making a donation, Shirshikov advised ensuring that the organization qualifies for tax-deductible contributions. “This not only guarantees that your donation is used effectively but also secures your tax benefits.”
Rawal noted the same: “Always ensure the charity is a qualified 501(c)(3) organization to guarantee that your donations are tax-deductible.”
He added that leveraging these strategies can significantly enhance both the impact of your donations and your personal financial benefits.
Plan for Legacy and Estate Considerations
“Incorporating charitable giving into your estate planning can provide significant tax advantages and ensure your philanthropic goals are met,” said Shirshikov. “Establishing charitable trusts or bequests can help reduce estate taxes while leaving a lasting legacy.”
Engage With Financial and Tax Advisors
According to Shirshikov, consulting with financial and tax advisors is essential to navigate the complexities of charitable giving. “Advisors can tailor strategies to your specific financial situation and charitable goals, ensuring maximum benefits for both you and the recipient organization.”
Overall, experts advise moderation over everything.
“Having navigated these decisions both professionally and personally, I know the impact thoughtful planning can have,” said Godur. “My approach is always to integrate charitable giving into a broader financial strategy, ensuring that generosity goes hand-in-hand with sound financial planning.
“By considering these factors, you can make your charitable donations more impactful and financially beneficial.”
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