Itemizing your income tax return used to be an easy way for the average person to claim a deduction for charitable donations.
But since the 2017 Jobs and Tax Cut Act nearly doubled the standard deduction, it’s estimated that only 10% of Americans itemize their returns, down from 30 percent, according to the National Council of Nonprofits.
While tax benefits shouldn’t be the driving force behind your charitable donations, there are other ways to maximize your donations that you may not be aware of.
Working with a financial advisor can shed light on other options that can help you support the causes you care about most while lowering your tax liability.
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How can a financial advisor help with charitable giving?
Financial advisors usually help you grow your wealth, but they can also help you give it away.
For many people, giving back is a core part of their values. After all, it’s satisfying to help the communities and causes we care about.
But like saving for any purpose, charitable giving requires a strategy. By incorporating philanthropy into your larger financial plan, you can give back to your favorite organization in a meaningful and sustainable way.
A financial advisor can help you create a roadmap for your philanthropy. They can budget your donations, identify the best assets to donate to charity, and use the most tax-efficient structures for your donations.
Here are five ways a financial advisor can help you with charitable donations.
1. Define your goals
Maybe you’ve always dreamed of establishing a scholarship for low-income students at your alma mater, or setting up a foundation to support the arts. But knowing how to translate your charitable ambitions into meaningful action can be challenging.
A financial advisor can help you create a comprehensive charitable plan that aligns your donations with your larger financial goals.
The details in your plan depend on factors such as your age, portfolio and how much you are willing or able to give.
By creating a plan, you have more control over how and when your money is distributed to charity. Would you like to see the impact of your donations now, or fund a foundation to support your favorite charities after you’re gone?
Whether you’re focused on targeted donations or want to support a range of charities, a well-crafted plan will ensure your contributions make a difference.
2. Increase the impact of your donations
If you simply write a check to your favorite nonprofit every year, you could be missing out on tax benefits.
Here are some ways a charity advisor can help you maximize your donations:
- They may recommend “bundling” or “bundling” contributions. This means consolidating multiple years’ donations into one tax year, allowing you to exceed the standard deduction threshold and receive greater tax benefits.
- They may propose donating a percentage of the stock, bonds, or other valuable securities directly to the nonprofit. You won’t owe capital gains taxes on appreciated assets you’ve owned for at least a year (as you would if you sold them yourself), and you’ll get an income tax deduction for the full, fair market value of the shares.
- If you are over age 70.5, an advisor may recommend that you take a qualified charitable distribution through your traditional IRA. By donating assets directly from your IRA to your chosen charity, you can reduce your taxable income in retirement and meet some or all of the required minimum distribution if you are over age 73.
3. Creating a donor-advised fund
Donor-advised funds are one of the fastest growing philanthropic strategies, and for good reason.
You can contribute to a donor-advised fund and immediately receive a tax deduction for your donation when you file your tax return.
A unique feature of donor-advised funds is their ability to distribute money to charitable organizations over time, on a schedule that works for you. For example, you have the flexibility to make large charitable donations in one tax year and take the standard deduction in other years.
Meanwhile, the funds are invested in your donor-advised fund and have the potential to grow tax-free, providing a way to give even more to the causes you care about.
When you set up a donor-advised fund, you donate to a 501(c)3 that then donates to other charities. For example, Fidelity Charitable is a 501(c)3 that offers DAF services.
A financial advisor can help you choose the right fund for your specific needs, taking into account factors such as fees, investment options and administrative support. They also guide you in selecting a DAF supplier.
4. Creation of foundations and grants
Establishing a foundation provides a deeper level of control over how the funds are used, but it can be time-consuming to set up.
Starting a private foundation is similar to starting a business: you must create a clear mission statement, elect a board of directors, apply for permits, file federal and state tax documents, and ensure legal requirements are met.
Your financial advisor, working with legal and tax professionals, can guide you through this process and help you understand the implications and benefits of establishing a foundation.
In addition, if you want to invest the foundation’s money, a financial advisor can offer investment management services and guidance.
5. Estate Planning Considerations
Many people want to leave a lasting impact on their favorite charities. By working with an attorney, your financial advisor can help you incorporate gifting strategies into your estate plan.
For example, a charitable remainder trust allows you to benefit from an income stream during your lifetime, as well as tax deductions for the current year when assets are donated to the trust. Your designated charity will own any assets left in the trust when you die.
Meanwhile, naming a charity as a beneficiary in your will or living trust is one of the easiest ways to donate to nonprofits through estate planning. Additionally, it can reduce the amount of your taxable estate.
A financial advisor can help you explore each of these strategies and choose the right one.
How to choose a financial advisor
When choosing a financial advisor, it is critical to look for a fee-only fiduciary. These professionals are ethically obligated to work in your best interest – not in the interests of insurance companies or financial institutions. They provide unbiased, personal advice you can trust.
You will need to look for advisors with expertise in charity planning. If your estate is particularly large and complex, you may want to work with a wealth manager, as many of these professionals offer philanthropic planning services for high-net-worth clients.
Online platforms and professional associations, such as the CFP Board’s Let’s Make a Plan, offer directories of advisors you can search. You can also ask for recommendations from friends, family, or colleagues who have experience with charitable giving.
When you meet with potential advisors, ask about their experiences and inquire about specific cases they have handled. Pay attention to their communication style, transparency and fee structure.
In short
By working with a financial advisor, you can elevate your charitable donations from well-intentioned gestures to high-impact strategic contributions.
Ultimately, the right advisor will be one who aligns with your values, demonstrates expertise in their field, and offers a personalized approach to helping you make a positive impact through your philanthropy.
