Jesus commissions His disciples in Matthew chapter 10 to serve the sick and the marginalized in society. His words to them are of selfless generosity, saying “Freely you have received, now freely give”. In the same way, we should generously and joyfully give out of our abundance to the Church and to organizations that are outreaching to others in need - in fact there are many reasons why we should give willingly. The difference is that, in present day, we may as well also take advantage of tax breaks as to further our ability to be generous.
Just like every aspect of our financial plan, we can be most effective with our resources when we use discipline and careful planning.
Tithes to church and donations made to qualified charities can generally be deducted from federal income taxes so long as the taxpayer is itemizing their deductions. The realized benefit, therefore, varies by tax bracket and tax situation.
Let’s use a simple $100 gift to a qualified charity as an example:
For someone in the 30% tax bracket, deducting the $100 would result in a tax savings of $30. Therefore, the real cost to the donor is $70 even though the charity received $100. Similarly, someone in the 15% tax bracket would have a tax savings of $15 and a real cost of $85. Both examples assume that the donor is already itemizing their deductions on their tax return.
For this reason, households with variable incomes (such as business owners or commissioned salespeople) will oftentimes wait until the very end of the calendar year to figure their major charitable giving decisions. They can then estimate where they expect their income to end up, what their tax bracket will be, and where they are standing in comparison to their charitable giving and tithing goals. Given this, it’s no surprise that over 30% of all charitable gifts are made in the month of December!
3 Tips for Efficient and Effective Giving
1. Donate Appreciated Assets
This is often one of the most overlooked tools for effective charitable giving. Gifting appreciated assets such as publicly traded stock often yields deduction from income taxes and an avoidance of capital gains tax.
Let’s say 100 shares of XYZ Corp. stock were purchased 5 years ago for $10 per share. The cost basis is therefore $1,000 in total. The stock price has since doubled and is now worth $20 per share, or $2,000 in total.
Now let’s say the owner of the stock intended to make a charitable gift of $2,000. If the stockholder sells the stock for cash they will be subject to capital gains tax -- typically 15% on the gains, or in this case $150. The owner would then be left with $1,850 towards their goal of a $2,000 charitable gift.
This is inefficient.
Instead, the donor should transfer the stock directly to the qualified charity. The charity will likely sell the stock and immediately receive the $2,000 donation. The donor can deduct the full $2,000 donation without ever being subject to the capital gains tax.
Lastly, if the donor still wishes to own the same amount of XYZ Corp’s stock they can simply go back and purchase $2,000 of stock at the current price of $20 per share. They are now effectively in the same cash position as if they would have simply written a check to the charity for $2,000, and they still own 100 shares of stock. The difference now is that they’ve raised their cost basis on the stock from $1,000 to $2,000. This will benefit them whenever they decided to sell in the future.
2. Start a Donor Advised Fund (DAF)
A DAF is a financial vehicle that allows individuals to gift funds, realize the deduction immediately, and determine later what organization or church the dollars be gifted to. This is a convenient way to track generosity while allowing time to be very intentional about where the dollars go. One great option for opening a DAF is the National Christian Foundation (NCF) on the basis of their Christ-centered focus, low fees, and user friendliness.
3. Give directly from an IRA
This doesn't apply to most of my readers, but individuals who are at least 70 ½ years old with a Required Minimum Distribution (RMD) can exclude from income up to $100,000 of gifts made from an IRA directly to qualified charities. Congress made this a permanent exclusion just last year, which makes it worth noting even for those under the qualifying age. The key benefit for gifting directly from an IRA is that it counts towards the individuals RMD. This in turn lowers the taxpayers Adjusted Gross Income (AGI) which is likely more valuable than a charitable deduction.
3 Reminders for End of Year Giving
1. Postmark by Dec 31
Donations sent by mail must be postmarked by December 31 to be deductible on the current tax year. A good alternative for those cutting it close is to give online before midnight on the 31st. Most qualified charities and churches have online giving right on their website.
2. Get a Receipt
Income tax regulations require substantiation for any gift of $250 or more. It is a good practice to always get a receipt and to store receipts together for tax purposes. This will prove handy when preparing taxes, and in the event of an audit.
3. Your Time is Not Deductible
Volunteer time and transportation to and from the place of volunteering is generally not deductible. Other direct expenses, however, can be. Was a purchase made as a requirement of volunteering? Were you not reimbursed for travel while on the volunteer job? Keep good records, as these expenses can likely be deducted.
Selfless generosity should always be our primary motivation. At the same time, being efficient and effective with our giving only allows us to be even more generous now and in the future. Tithing and charitable giving as a central component, and not merely an afterthought, is an important part of a healthy financial plan. At Wacek Financially Planning, we are eager to help you create a plan you are confident in so that you can give joyfully and generously!
Note: Wacek Financial Planning, LLC does not practice law or accountancy. Talk to an accountant or attorney before implementing any of the tax savings strategies.
About Wacek Financial Planning
Founder, Ben Wacek, is a fee-only, Certified Financial PlannerTM who has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective, using Biblical principles. If you’d like to learn more about Wacek Financial Planning, please visit www.wacekfp.com.
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