Why do Americans give? With the pressure of keeping up with the Joneses and the greed of Wall Street often in the news, especially since the 2008 financial crisis, it is actually pretty surprising how many people practice charitable giving. You could give strictly for tax reasons, but at the end of the day, even the highest wage earners are only saving 50 or 60 cents on every dollar they give away. The below paragraph gives a small window into the just how much money is flowing into the non-profit sector in billions of dollars.
Americans gave $358.38 billion in 2014, an encouraging number, and up 7.1% from the prior year. In fact, 95.4% of households gave to charity in 2014, with the average household gift being $2,974. Individual giving far exceeds corporate and foundation giving, making up 72% of the total giving in America. Giving back to the community is an amazing thing, and in some sense a part of the American dream. Americans still believe in everyone having a chance at success, and this is reflected in the fact that 85% of high net worth households gave to educational causes, and 81% of these families also gave to basic need causes.
(Source: http://www.nptrust.org/philanthropic-resources/charitable-giving-statistics/ )
You and I both know $358.38 billion is enough money to have some serious impact on the world, but there are several ways to easily increase your giving, simply by the means in which you do it and the organizations you do it through. Consider the following 4 ways to have more impact with your gifted dollar.
Plan Your Giving
Giving is important and can be a lot of fun, especially when it takes place at the intersection of ability, resources and passions. There are so many ways to give, including giving of your time, of your knowledge, and of your financial resources. I am never as consistent as I would like to be with beginning and end of year planning, but this year my wife and I chose to have a word of the year. This year’s word was HOPE, so our mission for the year is how to be filled with hope, and give hope to others. This plan has provided focus to our lives and to our giving.
Here’s how you can make a plan that will help you make giving a priority and a joy in your life. Start by reviewing the causes you are giving to each year, and make sure they still align with your desires for how you want to impact the world. Consider a word of the year to provide focus, and ask yourself “why” questions regarding the amount of money you give, the causes you give to, and the organizations that carry out those causes. Here are just a few examples:
- Why did we give $5,000 to charitable organizations last year?
- Why did we select child hunger in America as an important cause?
- What organizations do the best job of eradicating hunger in the US?
- Would we rather use a national organization that has significant funding, or a local organization where we could be more involved in carrying out the causes we are passionate about?
- Why did we give our unneeded resources to Goodwill instead of Ark?
In my experience, you will receive more satisfaction and less regret from a decision that is well formed and based on sound reasoning than one that is made out of convenience and comfort. With that being said, I will make a very slight contradiction. Spontaneous giving can be really fun and rewarding as well. Most of the time this ends up happening with cash and may not be tax deductible, but it can be very practical to just buy someone groceries, or leave a surprise on the door of someone you know has been through a hard time. It might be wise to set aside a portion of your giving for this (ie: plan your unplanned giving). Growing up, my family was always intentional about this type of giving, and we called it our Random Acts of Kindness fund.
Gift Planning & Playing The Brackets
On a much more scientific note, if you are looking to maximize your tax benefit, evaluate your income and giving each fall to make sure that you are being “bracket smart” with your giving. One way to do this is what we call “playing the brackets”. Assuming you file a joint tax return, the numbers you should watch are $74,900, $151,200, $230,450, $411,500 and $464,850. Each of these is a taxation breakpoint, where you will be paying an incrementally higher percentage for each dollar earned.
If you are near one of these breakpoints, planning to itemize your taxes, and are considering a gift near the end of the year, it would likely be worth your while to go ahead and complete the gift to prevent yourself from having dollars taxed in a higher bracket. Remember, this is not your gross income we are talking about; it is your taxable income. You get to back out money contributed to 401k’s, IRAs, Health Savings Accounts, personal exemptions etc. before your other itemized deductions begin impacting your taxable income. Under $74,901, you will only save 15 cents on every dollar, but above that number you will save 25 cents or more. If your taxable income is $80,000, you could avoid paying $1,275 by making a $5,100 gift. This means you are able to channel $5,100 to charity with only $3,825 in after tax dollars. Doing the same $5,100 gift at $469,950, would result in $2,980.40 of out of pocket cost. Play the brackets and you’ll achieve your giving goals more quickly and effectively, while avoiding overpaying on taxes at the same time.
Use Appreciated Assets
One of the best ways to manage the amount of money you are giving and the tax impact of your giving is to give appreciated securities. The best way, in my opinion, is to use a donor-advised fund to give appreciated assets. It may not make sense for everyone, but if you are a high-income earner, with appreciated assets, you need to know about this tool. Capital gains, while treated preferentially for tax purposes, are still costing many higher wage earners nearly 30% to liquidate. With a 20% tax on gains plus a 3.8% add-on tax for passive income, and state tax on top of that, many are feeling the weight of capital gains tax. So how do you solve the problem?
If you are a giver, you have a unique opportunity. If you have historically given from cash, consider giving from appreciated securities instead. Let’s say you had invested $10,000 in 2000 during the tech bust, and your original investment is now worth $25,000. In order to use your $25,000 today you would have to liquidate the position, creating a gain of $15,000, and likely having to pay taxes near $4,500. This reduces your profit by almost a third, giving you $20,500 to work with. Say you typically give away $25,000 a year, just to make our math simple. If you do your giving from cash flow, you will need a full $25,000 to give these dollars away, and you will save a little money each year for the gift. This is a fantastic practice, but if you had used the appreciated securities to give you could have saved $4,500 in taxes and gotten the deduction at the same time.
You probably know this, but churches, philanthropic organizations, and other not-for-profit companies usually pay no taxes. They operate within the tax code for exempt organizations and typically serve a purpose designed to further or advance the community. With that being said, if you give them an asset, be it a stock, shares of a company, a piece of property etc, they can likely liquidate the positon without any tax impact. If you were to do the same, you would likely pay between 20% and 30% to accomplish the same task. If you have charitable desires, giving appreciated assets is a pretty effective tool because you get the same deduction and nobody ever pays tax on the appreciation (growth) of the investment.
A donor-advised fund can enhance your control over these types of situations by allowing you to make a gift for tax purposes, control where the gift will ultimately go, and delay sending your gift to its end user/ultimate beneficiary until you desire. This is one of those too-good-to-be-true moments when you sit and wait for the catch, and it never comes. Essentially, you can use your donor-advised fund as a holding account to allow you to liquidate anything from stock to a portion of your company without paying tax, as long as it is designated for a charitable purpose. It can even be invested if you have a large balance that you plan to distribute over time.
If you are in a high tax bracket with taxable investments, it is certainly worth looking into.
Be Involved With More Than Just Money
One of the best ways to vet a charity is to be involved yourself. There is certainly no way to place your money with a perfect organization, but the more you are involved with the people and functionality of the organization, the better you will understand how they work, what they could do better, how they manage their money. Being a volunteer participant, board member, or even an employee at the organizations you contribute to is often a very good idea that will open your eyes to what is going on behind the scenes. Make sure your money is working hard for you, and that it is being used well to accomplish the purposes and functions you desire most!
Daniel Graff is a Director of Financial Planning at Weatherstone Capital Management, a money management firm that utilizes active money management strategies that are designed to generate strong returns while reducing the level of risk that is found in most stock and bond market investments.