How to Maximize Your Charitable Donations
Charitable Giving has been on the minds of many this year.
After guiding hundreds of people through George Kinder’s 3 Questions, I can say with certainty that, when it comes down to it, most people want to leave this world a better place than they left it.
What’s important?
Experiencing the world - through travel, food and quality time - often with family and friends
Being generous to family and friends as well as towards one’s community
Raising kind, thoughtful human beings
Leaving a unique impact upon the world
Just a few weeks from a crucial election that will shape our nation’s future, one could argue that there is no time like the present to give. If you’re in the fortunate position to be someone who has the capacity to donate to those in need at this moment, this post is for you.
The majority of our clients own appreciated stock (stock that has risen in value since you first bought or inherited it) and have aspirations to donate to charities they believe in. In this post we’ll highlight why donating appreciated stock (when possible) is better than gifting cash, and how to do it. We’ll wrap up by providing you with a brand new resource we’ve released on our website, highlighting some 501(c)3 charities that both align with Mana’s values and accept donations of stock.
A recent study by Fidelity Charitable showed that 80 percent of donors own appreciated assets, such as stocks, mutual funds or bonds, but only 21 percent of those donors have contributed these types of assets to charity.
Do all donations qualify for tax deductions?
One way many of us have felt called to action this year is by giving our money to people and causes in need. As an added bonus, new rules on charitable deductions were passed through the CARES Act for tax year 2020:
Taxpayers who take the standard deduction (meaning you do not itemize your deductions) are able to deduct up to $300 per taxpayer ($600 for a married couple).
Individuals who itemize can elect to deduct charitable donations of up to 100% of their 2020 AGI (up from 60% previously). This higher deduction does not apply to donations directly made to a Donor Advised Fund (more on this later).
As our clients asked for help through the process after the passing of the CARES Act, it became clear that many need guidance on a rather nuanced distinction:
Which donations qualify for a tax deduction vs. which don’t.
If you want to optimize your tax deductions by donating to charity, you must donate to a 501(c)3 charity to get a tax benefit. The charity’s website should make it clear that the institution a 501(c)3 and whether or not contributions are tax deductible.
Many of our clients who donated to Color of Change were surprised to realize that it was not a 501(c)3 but instead a 501(c)4 advocacy organization with an affiliated political action committee; their contributions did not count as tax deductible donations.
Bottom line: If there’s an organization you want to donate to that’s not a 501(c)3 because you believe in their mission, donate because you care. If you care about paying less in taxes, make sure you are donating to a 501(c)3 organization. At Mana, we encourage clients to make whatever choices support their highest purpose in life. If that higher purpose comes with an incremental tax benefit, then it’s icing on the cake.
Why is donating appreciated stock better than donating cash?
When it comes to charitable giving, every financial planner will tell you that it’s always better to donate appreciated stock vs cash.
Let’s review: appreciated stock is...
Long-held stock you might have inherited from parents or grandparents.
Long-held stock you received from exercising options at least a year prior.
And two other requirements that make this strategy effective include:
You need to have held the stock for at least a full year.
It needs to have grown from the cost at which you acquired it.
Why is it better to donate these stocks instead of cold, hard cash to charities?
Reason #1: You’ll be giving more. By donating stock that has appreciated for more than a year, you are actually giving away 15% - 20% more than if you sold the stock and made a cash donation. Why? Because you’re avoiding capital gains taxes. The max federal capital gains tax rate is 20% on long term holdings. If you’ve held just about any stock or ETF over the past ten years, your stock is likely to have made a lot of money. If you sell the stock, you’ll have to pay tax of either 15% or 20% on the growth, depending on your tax bracket. Another bonus: the IRS definition of appreciated assets also includes assets that are not publicly traded, like restricted stock or bitcoin (Mana clients with stock compensation and/or who own bitcoin - we’re winking at you).
Reason #2: You’re diversifying your portfolio. Many of our clients received a portion of their total compensation through restricted stock units (RSUs) and stock options. After working for a company for several years, there’s a high likelihood that your company’s stock will comprise a large chunk of your net worth. Implementing a donation strategy for a portion of your company stock each year can help you and your investment advisor rebalance your portfolio and optimize it to meet your short and long term goals.
Reason #3: You’re lowering your tax bill (now and in the future). The longer you hold a stock, the higher the probability it will gain in value. By donating stock you are able to avoid the inevitable capital gains tax that you will pay upon selling it. Right now the capital gains rate is at 15-20%, but we wouldn’t be surprised if these tax rates went up. Donating some of your appreciated stock will amplify your long-term tax savings, no matter the potential changes to the tax code.
Reason #4: Donating stocks can be done almost as easily through Mana. This is the part of the post that you’ve been waiting for. After hearing requests from our client base, we’re excited to announce a new part of Mana’s website: Charities We Love. A key feature that all of these organizations share is that they all accept donations of stock.
Ready to donate stock? Map out a giving strategy.
Once you’re ready to begin donating, it’s time to create a plan.
We recommend setting family goals for giving. If you’d like some inspiration on how to explain to your family why giving money to help others is a good thing to do, we love Ron Lieber’s book, The Opposite of Spoiled. Here, he presents three compelling reasons for charitable giving:
It’s a duty; families who have more than they need ought to give something so that families who have very little can have more of the things that they need or can’t afford.
Research on happiness shows that the amount we give away is a great predictor of how happy we are. In fact, it’s as strong a predictor of happiness as our income is.
Communities are stronger when they can rely on one another. We would all feel better knowing that we live in a neighborhood, city, country and world where we will help others when they’re having a hard time and they will help us if we need it. Giving generously when we can helps reinforce our common bonds.
Your charitable donation can be defined as a percentage of your income, a percentage of your net worth, a flat dollar amount each year, or a larger amount every several years (known in financial planning as charitable bunching). Regardless of the approach you choose, it’s important that everyone in your family is on board and has a say in the charities you contribute to. Once decisions are made, loop in your financial planners so they can help you sort out the mechanics of your giving strategy.
Stephanie Bucko and Cristina Livadary are fee-only financial planners based in Los Angeles, California. Stephanie is the Chief Investment Officer and Cristina is the Chief Executive Officer at Mana Financial Life Design (FLD). Mana FLD provides comprehensive financial planning and investment management services to help clients grow and protect their wealth throughout life’s journey. Mana FLD specializes in advising ambitious professionals who seek financial knowledge and want to implement creative budgeting, savings, proactive planning and powerful investment strategies. As fee-only fiduciaries and independent financial advisors, Stephanie and Cristina never receive commission of any kind. Stephanie and Cristina are legally bound by their certifications to provide unbiased and trustworthy financial advice.