For many individuals and families, charitable giving represents a vital aspect of their lives. The Giving USA 2024 report reveals that over $550 billion was donated to various causes in 2023, with individuals contributing more than $374 billion. Among the recipients, religious organizations received more than $145 billion.
Despite this notable generosity, many donors struggle to give effectively. This challenge is particularly pronounced for those outside the wealthiest circles, who often lack access to a team of financial experts to streamline their donations. Even experienced finance professionals may find themselves ill-equipped to navigate the complexities of charitable giving, an area frequently overlooked in traditional finance education.
Understanding the challenges of charitable donations
The charitable giving landscape has changed significantly since the Tax Cuts and Jobs Act of 2017 was enacted. This legislation raised the standard deduction and placed limits on certain deductions, such as mortgage interest and state/local taxes. Consequently, an increasing number of taxpayers are unable to itemize their deductions, resulting in a scenario where they may end up spending more than $1 to donate $1. Phil DeMuth refers to this situation as negative giving power.
Effective strategies for maximizing donations
While some commonly recognized methods for making tax-efficient donations exist, such as donating appreciated assets or consolidating contributions into a single year, success hinges on understanding which assets to donate and how to consolidate them effectively. The IRS tax code provides specific guidelines regarding the types of assets that can be donated and the limitations associated with each donation type.
In his book, *The Tax-Smart Donor: Optimize Your Lifetime Giving Plan*, Phil DeMuth categorizes charitable giving into twelve informative chapters. These chapters address various forms of giving, including cash donations, securities, retirement accounts, and property gifts. Each method is subject to different regulations, and charities often prefer consistent, predictable contributions rather than sporadic large donations.
Utilizing donor-advised funds
A straightforward way to make tax-efficient contributions is through a donor-advised fund (DAF). Initiated by the New York Community Trust in 1931, DAFs can be established through major financial institutions such as Fidelity, Vanguard, and Schwab. These organizations manage investments and necessary paperwork for a modest initial contribution, with Vanguard requiring a minimum of $25,000 to set up an account, while Fidelity and Schwab impose no minimums.
Understanding charitable trusts
Although DeMuth presents various strategies applicable to a broad audience, he notes that certain techniques, such as charitable lead annuity trusts (CLAT), are primarily intended for high-net-worth individuals due to their complexity and associated costs. For example, a CLAT is not classified as a charity and may incur capital gains taxes, depending on its classification as a grantor or non-grantor trust. While such trusts may not be relevant for most individuals, universities often encourage alumni to consider this option.
Throughout *The Tax-Smart Donor*, DeMuth offers valuable comparative tables that illustrate the effects of different giving types. He guides readers through the necessary procedures to ensure they can maximize tax benefits from their donations, stressing that the IRS maintains a strict stance against errors. Many donors mistakenly believe they can provide required documentation at a later time, but the IRS does not permit retroactive adjustments.
Planning for the future of giving
In a chapter titled “Three Scenarios for Tax Strategy,” DeMuth introduces a fictional character, Renee, whose charitable journey is explored across various life stages and financial situations. For each scenario, he assesses whether Renee can afford to contribute and how she might optimize her giving for maximum impact.
The central message of the book is that charitable giving should be part of a comprehensive lifetime plan, which may involve strategically delaying donations until they yield the most benefit. Some individuals may choose to hold off on giving, believing they can grow their capital more effectively than charities. DeMuth addresses this by discussing investment strategies aimed at enhancing charitable contributions.
Despite this notable generosity, many donors struggle to give effectively. This challenge is particularly pronounced for those outside the wealthiest circles, who often lack access to a team of financial experts to streamline their donations. Even experienced finance professionals may find themselves ill-equipped to navigate the complexities of charitable giving, an area frequently overlooked in traditional finance education.0
Despite this notable generosity, many donors struggle to give effectively. This challenge is particularly pronounced for those outside the wealthiest circles, who often lack access to a team of financial experts to streamline their donations. Even experienced finance professionals may find themselves ill-equipped to navigate the complexities of charitable giving, an area frequently overlooked in traditional finance education.1