For many families and individuals, contributing to charitable causes is a fundamental aspect of their lives. According to Giving USA 2024, donations exceeded $550 billion in one year, with over $374 billion coming from individual contributors. Religious organizations received more than $145 billion in support.
However, many Americans struggle to give in a way that maximizes the benefits of their contributions. Unlike the ultra-wealthy, who often have teams of financial experts to guide their philanthropy, most individuals lack the resources and knowledge to navigate the complexities of charitable giving effectively. This gap in understanding is evident even among seasoned professionals in the financial sector, where training on charitable contributions is often limited.
Understanding the landscape of charitable giving
One significant challenge arises from the changes brought about by the Tax Cuts and Jobs Act of 2017, which increased the standard deduction and limited various itemized deductions. Many taxpayers find themselves unable to itemize their deductions, leading to a situation where they may have to spend more than they contribute. This phenomenon, termed negative giving power by author Phil DeMuth, highlights the inefficiencies that can plague charitable donations.
Common strategies for effective donations
While some strategies for tax-efficient giving, such as donating appreciated assets or grouping donations, are widely known, the success of these methods largely depends on understanding which assets to give and how to time contributions strategically. The IRS tax code delineates specific guidelines that dictate how much can be donated, varying by asset type and donation vehicle.
In his book, The Tax-Smart Donor, DeMuth provides an insightful framework for navigating these complexities, dividing the material into twelve informative chapters. Topics range from donating cash and securities to retirement account philanthropy and gifting property, each governed by its unique set of regulations. Notably, many charities prefer consistent contributions, as these provide predictable funding rather than sporadic large donations.
Utilizing donor-advised funds for tax advantages
One of the simplest and most tax-efficient ways to contribute is through a donor-advised fund (DAF), a concept first introduced by the New York Community Trust in 1931. DeMuth explains how major investment firms like Fidelity, Vanguard, and Schwab facilitate the creation of DAFs, which handle the management and paperwork for donations. For instance, Vanguard sets a minimum contribution of $25,000 to establish an account, while Fidelity and Schwab impose no minimums for contributions.
Charitable trusts: a complex option for the affluent
While many strategies outlined in the book are accessible to a broad audience, DeMuth cautions that certain mechanisms, like charitable trusts, are often suitable only for high-net-worth individuals due to their intricate structures and associated costs. For example, a charitable lead annuity trust (CLAT) is not classified as a charity itself and is liable for capital gains tax, with the tax obligations influenced by whether the trust is a grantor or non-grantor trust.
Despite the complexities, institutions such as universities frequently encourage alumni to explore charitable trusts as part of their giving strategy. Throughout his work, DeMuth incorporates comparative tables to demonstrate how various donation types can impact an individual’s tax situation, emphasizing the importance of adhering to IRS rules to avoid costly mistakes.
Planning your charitable giving journey
In a chapter titled “Three Scenarios for Tax Strategy,” DeMuth follows the fictional character Renee through different life stages, examining her capacity to contribute to charitable causes and the optimal methods for doing so. The overarching message is that philanthropy should be integrated into a broader lifetime financial strategy, which may involve postponing donations until the timing is most advantageous.
Some may delay their charitable contributions, believing they can achieve superior returns on their investments compared to the charities themselves. DeMuth addresses this concept in a dedicated chapter, underscoring that many organizations struggle to generate competitive investment returns. This approach is reminiscent of Warren Buffett, who strategically deferred his charitable giving during his early career, allowing him to amass significant wealth for more impactful donations later in life.
However, many Americans struggle to give in a way that maximizes the benefits of their contributions. Unlike the ultra-wealthy, who often have teams of financial experts to guide their philanthropy, most individuals lack the resources and knowledge to navigate the complexities of charitable giving effectively. This gap in understanding is evident even among seasoned professionals in the financial sector, where training on charitable contributions is often limited.0
However, many Americans struggle to give in a way that maximizes the benefits of their contributions. Unlike the ultra-wealthy, who often have teams of financial experts to guide their philanthropy, most individuals lack the resources and knowledge to navigate the complexities of charitable giving effectively. This gap in understanding is evident even among seasoned professionals in the financial sector, where training on charitable contributions is often limited.1