“Every dollar makes a difference.”
— Michael Bloomberg
People love to give. It feels good. It makes a difference. Research shows that giving makes people happy. It changes lives. And in most cases, it even offers tangible rewards in the form of a tax deduction.
When it comes to charitable donations, how — and how much — do Americans give? Who have emerged as leaders in philanthropy? What tips do you need to know to make sure your philanthropy is tax deductible? And is the small-but-growing trend of using donor-advised funds as a vehicle for charitable giving a fit for you?
Giving in America
Americans gave a record $373 billion dollars in 2015, according to National Philanthropic Trust. And while foundations and corporations played their part, the majority of these donations (about 80%) came from individuals and their bequests.
Who is on the receiving end? While there are many types of worthwhile causes, according to Giving USA, the majority of charitable dollars go towards:
- churches and religious organization (32%)
- universities and education (15%) and
- human services organizations that serve the hungry, homeless, and others in need (12%), followed by charities that focus on
- health issues, the environment and animals, public society benefit (civil rights and liberties, consumer rights, economic development) and arts/ culture and humanities.
For an increasing number of wealthy individuals, giving has become a mission. Well over 100 billionaires (or people who would be billionaires except for their giving) have signed the Giving Pledge, committing the majority of their wealth to philanthropy. (See who you recognize on the Giving Pledge list.)
And it’s not just billionaires that are making such pledges. Many successful people who are passionate about supporting ministries and other charities make giving their primary aim, sometimes even aiming for a “reverse tithe,” which means giving 90% and living on 10%!
Some business owners take the challenge to give even further. The Barnhart Brothers of Barnhart Crane and Rigging promised to maintain their middle-class lifestyles and giving away the rest should their business become prosperous. Their business grew by leaps and bounds — an average of 25% each year for decades, expanding to 25 different locations — until the business was giving away $60 million per year and the brothers were living comfortably on a mere 1% of the profits. As the Philanthropy Roundtable reports, Barnhart employees help choose charities around the world, from microfinance projects in the developing world to helping children in rundown Memphis neighborhoods.
The three founders of the Clarity Project call their fair-trade diamond business a “social enterprise,” investing 100% percent of profits in mining communities via collaboration with the nonprofit Shine on Sierra Leone. According to one of their press releases, they measure their progress “by the number of children educated, crops planted, and health clinics operated, rather than solely relying on market share and profits.”
Over 98% of high net worth individuals donate to charity, citing “giving back to the community” as their chief motivation. But philanthropy isn’t just for the uber-successful. Giving is practiced by a majority of households in America. According to Gallup, 83% of Americans reported giving to a church, a charity, or both.
On average, Americans give an average of 2-3% of their income to charitable donations, a percentage that has remained fairly steady over time. The generous people of Utah are the outliers, giving an average of 6.6%, according to WalletHub.
Give and You Shall Receive… A Tax Deduction!
Tax-deductible charitable donations are truly a win-win. To ensure you receive and maximize your tax deduction:
- Make sure your intended charity is a 501(c)3. Not all good causes are non-profits, and not all non-profit organizations meet the criteria for tax-deductible donations.
- Itemize deductions on your taxes, if it’s worth it. Not everyone can benefit from charitable giving tax deductions. If your itemized deductions don’t exceed your standard deductions (as may be the case if you don’t have a business and/or home deductions) it won’t be worth itemizing.
- Save your receipts. You can file them, put them in a box, scan them, or send them to a bookkeeper who will handle it for you.
- Donate things you don’t use. Clean your closets, clear your garage and minimize your stuff to maximize your deductions.
- Document value of non-cash gifts. The “It’s Deductible” app makes it easy to establish the value of used clothing and other common items you might wish to donate.
- Understand the IRS restrictions. There are limits on how much you can deduct, rules about how long assets must be held, and you can’t receive anything in return for a tax-deductible gift. See this Turbo Tax article for more details.
- Donate appreciated assets. If a stock has risen in value, you can donate the stock rather than sell it and pay capital gains. The charity won’t have to pay the capital gains, and you can then reinvest with money from another source, making the move a win-win.
Short on cash? Give a smile and a helping hand. Consider volunteering your time or even helping your favorite charity with fundraising efforts.
Are you giving consistently and wish to be strategic? You may want to consider the next strategy…
Donor-Advised Funds Are the New Foundations
A lesser known, more advanced tax strategy is that of donor-advised funds. Growing in popularity, according to a recent report from the National Philanthropic Trust, there are now more than 217,000 donor-advised funds. They offer attractive benefits and flexibility for people who are able to give generously but don’t wish to manage a foundation or put all their assets in a trust.
A donor-advised fund (or DAF) is a fund or account that is managed on behalf of a donating individual, family, or organization by a section 501(c)(3) organization, which is the sponsoring organization. The donor opens an account and contributes cash, securities or other assets to the fund. The donor surrenders ownership of the assets, but as “advisor” of the fund, they retain a high level of control over how the fund is invested and how the money distributed to charities, ministries, or other non-profits.
DAFs lie somewhere in between a simple cash gift and more complex strategies using trusts or family foundations. They provide some of the advantages of both traditional charitable giving and charitable foundations. They are efficient, flexible, and bring an immediate tax benefit with a continuing level of control over how assets are grown and used.
As The Wall Street Journal summarized,
“…Donor-advised funds… allow donors to donate now and deduct at current tax rates, while making the charitable gifts later. In effect, they are miniature versions of private foundations—but without the considerable expenses or hassles. They also are a rare example of a tax-favored vehicle that can work equally well for the wealthy and the merely affluent.”
Benefits of Donor-Advised Funds
Privacy. Donor-advised funds are an ideal way to make donations anonymously if desired. After all, you can’t send cash through the mail, and it’s hard to write an “anonymous” check!
Deduct now, decide later. DAF’s can provide a way to get a tax deduction now for donations you’ll make to charities in the future, provided that you’re willing to commit those monies into a Donor Advised Fund now. This can be an excellent way to support a charity over time, or it can come in handy when the end of the year is nearing and you’d like to defer your charitable donation decisions beyond December 31.
Invest now, give later. Perfect for long-term giving, a donor-advised fund can be invested in a variety of ways if the donor wishes to distribute monies to charities over time.
Increased options. Donor-advised funds are also a great strategy for liquidating an appreciated asset while retaining the ability to give it to multiple charities, instead of just one. You can also donate a non-monetary asset (car or boat) to a DAF and then use it to give to charities that aren’t set up to accept non-monetary donations.
Simplified record-keeping. The donor-advised fund keeps track of donations and provides a donor an annual statement that details all donations. This saves the donor time and trouble, as they don’t have to track down letters from each organization at tax time.
Be a Go Giver
Finally, as Bob Burg’s Go-Giver book explains so well, remember that it truly is more blessed to give than to receive. If we are longing for success, rather than going out and GETTING it, we want to learn how to GIVE our way to a more fulfilled life. If you wish to receive, learn to give, during the holidays and every other season as well.
If there’s anything we can do for you, reach out to us… I’ll be out of the office (Kim) until early January, but we are checking emails and looking forward to serving you in 2017.
We are also excitedly preparing for the official launch of our new book, Busting the Life Insurance Lies. Stay tuned as we’ve got digital stocking stuffers coming for everyone on December 20th!