Five Strategies to Increase the Effectiveness of Your Charitable Giving

1. Choose a Charity Carefully

The specific charities and causes you support can make a huge difference in the amount of good your donations can do. Each charity and nonprofit organization will use your donated funds differently according to its unique mission, operating needs, and business model. When choosing where to donate, thoroughly research the charitable organizations you are considering learning how the donations will be used and what tangible effects they will have on the community you are trying to help or the problem you are trying to solve. Make sure you not only agree with the organization’s mission but also evaluate its methods, effectiveness, and financial reports. Several reputable organizations have compiled financial information to help donors assess and compare various charities. Take advantage of these resources to choose a charity wisely and learn about the organizations you support.

2. Donate Appreciated Stocks, Bonds, Mutual Funds, or Real Estate

Donating appreciated assets such as stocks, bonds, mutual funds, or real estate instead of cash helps your money work harder for your chosen charity. Giving investments you have owned for at least one year to a charity allows you to avoid paying capital gains taxes on those investments when rebalancing your portfolio, and you can take an income tax deduction for the asset’s current market value. In most cases, neither you nor the charity will have to pay capital gains taxes on the long-term growth the donated investment has accrued. Donating shares of an index fund that have appreciated since you purchased them not only helps you give an asset with a higher market value than you initially paid for but also provides the charity with an asset that may continue to grow over time.

3. Know When to Itemize or Take the Standard Deduction

For those serious about charitable giving and those with the financial means to contribute a significant portion of their income to support charitable causes, it is essential to keep detailed records of all donations. It is equally important to check the standard deduction allowed each year and compare it to your qualified charitable contributions. You can then use this standard deduction amount to guide your giving and tax planning. If your donations exceed the standard deduction for a given tax year, itemizing each donation on your tax return will likely make the most financial sense. If your donations do not exceed the standard deduction in a given year, you can take the standard deduction and consider planning for how you might modify your approach to increase your charitable impact while lowering your income tax bill. 

4. Consider Bunching Your Donations

One way to take advantage of itemization is to plan for and prefund multiple years of donations in one tax year. This concept is called “bunching,” which is a common strategy for high-net-worth individuals. This strategy requires donors to have the ability to fund multiple years of donations upfront instead of spreading out donations over time, so it may not be feasible for families who live paycheck to paycheck or who do not have flexibility in their yearly budgets. However, those with the funds available upfront who have incorporated bunching in their long-term financial plan can take advantage of the tax benefits associated with this strategy. 

One way to take advantage of itemization is to plan for and prefund multiple years of donations in one tax year. This concept is called “bunching,” which is a common strategy for high-net-worth individuals. This strategy requires donors to have the ability to fund multiple years of donations upfront instead of spreading out donations over time, so it may not be feasible for families who live paycheck to paycheck or who do not have flexibility in their yearly budgets. However, those with the funds available upfront who have incorporated bunching in their long-term financial plan can take advantage of the tax benefits associated with this strategy. 

5. Give from a Donor-Advised Fund

 A donor-advised fund is an investment account dedicated to charitable giving. Establishing a donor-advised fund allows you to invest on behalf of a charity or cause you value and gives you more control over when that money is distributed. Funds contributed to the account are eligible for an income-tax reduction at the time the donation is made, regardless of when the funds are distributed in the form of grants. Another benefit of a donor-advised fund is that the invested funds can grow tax-free, boosting the returns available to make a difference for your chosen charity. If you utilize the bunching strategy, you can contribute larger lump sums into your donor-advised fund for an immediate tax benefit and then distribute the money throughout the year and in your off years to maintain a more consistent income stream for your charity of choice.