As the clock ticks down to the end of the year, fund-raisers are out in force. In the spirit of the season, and with an eye toward trimming your tax bill, you may be swayed to open your wallet—a sentiment we encourage. But if your largesse leaves you with no real sense that you’ve made an impact, make a plan to give smarter. You can put your plan into action now or make a New Year’s resolution to put it in place in 2015.
Begin with a simple exercise, says Sara Montgomery, philanthropic-services specialist with Wells Fargo Private Bank: Jot down the three things that are most important to you besides your family. It might be education, your faith or the environment. Involve your spouse or even the whole family in this discussion, and talk about the impact you want to make. “This is a dedicated amount you’re giving to make the world a better place,” says Brad Klontz, financial psychologist and coauthor of Mind Over Money (Crown Business). “What concerns you? How can you help?”
Monica and Ed Rebella, of Orange County, Calif., started out with contributions to United Way and slowly shifted their giving to benefit individual organizations in their community. They now support two universities, the local food bank and Working Wardrobes, which provides a helping hand to individuals reentering the workforce. When Monica’s parents became ill, the Council on Aging–Orange County was a huge help in finding resources and navigating Medicare, so the couple decided to support that group as well. “It was an evolution of the giving process,” Monica says. “You have to find what hits your heart and hits you at home.”
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You may have to do a little digging to find charities that best fit your values. Say you want to support efforts to fight a disease that you or a family member has struggled with. There might be several organizations with that mission, and you may have to choose between a group that, say, raises awareness of an illness and one that funds treatment and supports family members.
Before you research how an organization coordinates its efforts and uses the money it’s given, make sure it is a 501(c)(3) organization qualified to receive tax-deductible donations. Next, look into how the charity is run. Expect it to devote at least 75% of its budget to programs, with the remainder going to administrative costs and fund-raising. Charity Navigator provides detailed listings that cover the organization’s mission, income statements, financial and accountability performance metrics, and executive pay. Each charity gets an overall star rating (four is the maximum), as well as one rating for financials and one for accountability and transparency. GuideStar has basics on a charity’s tax-deductible status and recent tax filings. The Better Business Bureau gives an accreditation seal to charities that meet its standards for accountability.
Schedule your gifts
Once you’ve nailed down which charities you’d like to fund, figure out how to time your donations. Although many organizations have fund-raising pushes in December, their needs are year-round. Contact your most cherished charities to find out how best you can help. The Rebellas have committed to provide funding to each of their charities over a three- to five-year period based on each charity’s needs.
By scheduling your contributions throughout the year, you have more time to plan donations of certain assets—such as stock that’s not publicly traded or real estate—that need appraisal before transfer. Because so much of the charitable-giving push comes at year-end, brokerages and the charities themselves are working with higher volumes. That means paperwork for appreciated stock transfers can take longer. And if your company offers matching funds, administrators may be too busy to process a request that comes in too close to the end of the year.
Budgeting for the money you plan to donate is key to keeping the rest of your financial plan on track. Figure out a dollar amount or a percentage of your income that you’d like to donate, split it 12 ways, and enter it as a line item in your monthly budget, just as you would for your car or mortgage payments. Doug Orton, a vice-president with money-management firm MFS, recommends setting up a separate account just for charity (or a donor-advised fund) and scheduling automatic debits from your checking account so that the money is there when you need it.
When unexpected requests come up, you don’t have to say no to avoid blowing your budget. Build in a little extra each month to create a charity slush fund. That way, when a natural disaster or humanitarian need comes up, such as the West Coast wildfires or African Ebola outbreak, you’ll be able to respond with a donation. If you have friends or colleagues who are involved in charity events, a savings kitty can allow you to say yes to a request for a donation without derailing the rest of your charitable-giving plan.
Set up a charitable fund
A good way to control the timing of your giving is through a donor-advised fund. It’s easy to set up through a mutual fund company, brokerage firm or community foundation, and you can donate stocks, bonds, funds or other assets in addition to cash.
Richard and Lynn Blackburn started a donor-advised fund last September to manage their charitable giving. The fund is administered by Schwab, so the couple were able to move appreciated securities from their Schwab taxable brokerage account directly into the donor-advised fund. Schwab handles all the donation paperwork and checks out new groups it hasn’t worked with to make sure they’re qualified charities. The Blackburns support a wide variety of organizations, so a donor-advised fund’s ease of use dovetails with the tax benefits. Plus, the couple named their daughter as successor adviser so that she can eventually take over the giving.
You usually need $5,000 or more to set up a donor-advised fund. Fidelity and Schwab have $5,000 minimums for initial contributions, T. Rowe Price requires $10,000, and Vanguard requires $25,000. You get a tax deduction for the year you put money in the fund, but then you have time to plan how the money will be disbursed. Chris Kerckhoff, president of Plancorp, a wealth management firm, advises setting up a donor-advised fund in a year when you expect a big tax bill.
Some community foundations allow you to start smaller. For example, the Outer Banks Community Foundation, in North Carolina, sets a minimum of $1,000 to start a fund, though the total must reach $5,000 in the calendar year before the year you make a distribution. You can find a directory of community foundations nationwide at www.cof.org/locator.
You could also set up a scholarship fund through a community foundation or directly through a university. You set the criteria for applicants, though rules vary on how much contact you may have with the scholarship recipients. Expect to set aside $20,000 to $25,000 to endow a scholarship, but individual institutions set their own rules. For example, the University of Nevada–Reno allows donors to establish a scholarship with a $10,000 minimum contributed all at once or with smaller gifts over time. But both the University of New Hampshire and the University of San Diego require $50,000 to establish an endowment.
Cash or securities?
Look at your whole financial picture to figure out whether it’s more beneficial to your bottom line to give cash or appreciated assets. Ask a financial adviser for help, especially if you’re planning a large gift.
Giving appreciated stock directly to a charity gives you a dual tax benefit. You avoid paying taxes on the capital gains, and you can write off the full value as a donation when you itemize your taxes if you have owned the asset for more than one year (see 12 Smart Year-End Tax Moves to Make Now). Most charities hold accounts with a brokerage firm and can give you the information you need to transfer securities. Set a target price for investments you want to give, and when they hit that price, make the transfer.
If you need income, consider a charitable gift annuity or charitable remainder trust. Both allow you to donate (usually appreciated securities) to a good cause and receive an income stream in return. With a charitable remainder trust, you get an up-front charitable deduction, the trust pays you income during its term, and any assets remaining at the end of the term go to charity. A charitable gift annuity avoids the complexity and expense of a trust: You transfer assets to a charity, which promises to pay you or other beneficiaries an annuity. A portion of those payments is considered a tax-free return of your gift, but you will owe income or capital-gains tax on the remaining portion, depending on whether your contribution consisted of cash or appreciated assets.
Thinking ahead to estate planning with charity in mind? You may benefit the most if you give taxable assets, such as cash or money from your IRAs, to charity and leave assets that will step up in cost basis, such as appreciated stocks or real estate, to your kids. But every circumstance is different, so consult a pro.
For most charitable bequests, you can deduct up to 50% of your adjusted gross income. Look up the charity in the IRS database and note the deductibility status, which tells you what percentage of your AGI you can deduct for that type of organization.
