Charitable giving is more than just a way to support causes you care about—it can also play a strategic role in your financial plan that provides significant tax reduction benefits. However, simply giving to nonprofits doesn’t automatically qualify you for a tax deduction. As with all aspects of tax law, you must follow specific guidelines to ensure your donation is eligible.
Giving back to your community or supporting causes you believe in offers both personal satisfaction and financial advantages. As a high-net-worth investor, charitable contributions can provide substantial tax deductions that reduce your taxable income, helping you keep more of your wealth while making a difference in the lives of others.
The key is understanding how to optimize your giving to align with your financial goals. Charitable donations are generally tax-deductible, but they must be structured strategically to maximize their benefit, especially for those with significant assets and tax liabilities. This requires balancing personal values with smart tax planning, ensuring your giving aligns with your financial goals.
This blog will explore various charitable giving strategies, including associated tax benefits that can occur when dealing with donor-advised funds and the donation of appreciated stock.
As Birmingham, AL, fee-only financial advisors, the BCR Wealth Strategies team, which includes professionals with AIF, CPA and CFP® credentials, specializes in crafting highly customized charitable giving strategies that focus on minimizing your overall taxes.
Donor-Advised Funds: A Flexible Philanthropic Tool
One of the most popular charitable giving tools for high-net-worth individuals is the donor-advised fund (DAF). A DAF allows you to make a charitable contribution, receive an immediate tax deduction, and recommend grants to your favorite charities over time.
If you are a high earner who has experienced a significant liquidity event or is transitioning into retirement, donor-advised funds provide a unique opportunity to maximize your tax savings.
By making multiple charitable contributions in a single high-income year, you can reduce your taxable income more substantially than if you spread contributions over several years.
An example of how to leverage a DAF is that because standard deductions are now higher, fewer people itemize charitable contributions on their tax returns. This can limit the ability to realize the full tax benefits of annual giving.
To overcome this, consider “bunching” donations by making a large contribution to a donor-advised fund in a high-income year. This allows you to claim the charitable deduction that year, potentially lowering your tax bracket. The DAF can then distribute funds to charities over several years, giving you flexibility while maximizing the short-term tax benefits.
Watch our CEO, Marshall Rathmell, discuss enhancing your charitable giving.
If you are concerned about giving up control when making large contributions to a single charitable fund, a donor-advised fund also gives you control over your charitable donations. You can take your time deciding which organizations to support, making sure your gifts align with your values and create the greatest impact. This allows for greater flexibility and improved long-term planning, ensuring your charitable efforts are consistent with your goals.
Appreciated Stock: A Smart Way to Give
Donating highly appreciated stock is another effective charitable-giving strategy if you’ve built substantial wealth through employer stock options or other investments. It not only supports your philanthropic goals but also offers significant tax advantages.
Let’s say you were awarded 10,000 shares of your employer’s stock several years ago for $10 per share, and today, the stock has increased to $50 per share. Your total investment has grown from $100,000 to $500,000, resulting in a $400,000 gain.
If you were to sell this stock, you would likely owe capital gains taxes on the $400,000 profit. However, if you donate the appreciated stock directly to a qualified charity, you can avoid paying capital gains taxes entirely. Additionally, you can deduct the full fair market value of the stock—$500,000—as a charitable contribution on your taxes, assuming you’ve held the stock for more than a year.
This strategy helps you reduce your capital gains tax and provides a significant charitable deduction, maximizing both the impact of your donation and your tax savings.
If you hold highly appreciated employer stock, you may hesitate to reduce your concentrated position due to a sentimental attachment or fear of missing out on future gains.
Donating a portion of your appreciated stock can lower your risk of owning a concentrated investment while receiving a tax deduction and a capital gains tax break. Additionally, you can retain exposure to the stock by using the tax savings to repurchase it in a taxable account, reducing overall risk without losing out on the upside potential.
Integrating Charitable Giving Into Your Financial Plan
While charitable giving is a meaningful way to contribute to causes you care about, it’s also important to ensure that it fits into your overall financial strategy. Working with a team of experienced financial planners in Birmingham, AL, like BCR Wealth Strategies, can help you seamlessly integrate philanthropy into your financial plan, ensuring that your charitable and financial goals are met.
You should also consider how your charitable giving aligns with your long-term financial security. Overcommitting to charitable giving without fully understanding your long-term financial needs can jeopardize your retirement or estate plan.
A comprehensive financial plan can help you document and monitor your retirement needs and charitable contributions.
Get to Know BCR Wealth Strategies
Our team of fee-only Birmingham CFP® professionals can help you create a charitable giving plan that allows for tax-efficient giving while preserving your wealth for future generations.
At BCR Wealth Strategies, we specialize in helping high-net-worth individuals integrate philanthropy into their broader wealth management strategy. Our experienced financial advisors in Birmingham can assist you in navigating the complexities of charitable giving and ensure that your contributions align with your values and financial goals.
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