How can I make my giving more tax efficient? Charitable planning guide: Part five

In the final part of our charitable giving guide, we’ll discuss how you can use your charitable giving program to reduce your taxes.

There are a huge number of technical opportunities and challenges to doing charitable giving in a tax-efficient way. I won’t go into these in-depth but I will offer a few resources.

Charitable giving: A five part series on more effective philanthropy

One of the most broadly beneficial techniques is to use a Donor-Advised Fund. You can learn more in our prior piece on the power of Donor Advised Funds. It is especially useful to anyone who has appreciated stocks or other investments in a regular investment account, but can also be helpful to those donating cash. Whatever you donate to the fund, using a DAF makes it easier to track your donations and separate out your charitable budget from your own money right from the start.

Another commonly used technique is called charitable bunching. This technique may be useful to folks who regularly make significant tax-deductible donations and sometimes end up just below or just above the standard deduction level when they file their taxes. By “bunching” their charitable giving up into every other year or every third year, they can get a much bigger deduction that year and then still benefit from the standard deduction in the other years.

For example, imagine a married couple who contributes $5,000 to tax-deductible charities each year, deduct $10,000 in state and property taxes, and deduct $8,000 in mortgage interest annually. Currently, they probably take the standard deduction of $24,000 each year, which is the same deduction they’d get if they didn’t give to charity at all. By donating $15,000 every third year instead, they can itemize and deduct $33,000 that year and still get to deduct the $24,000 in the other years. This creates approximately $9,000 less in taxable income, which probably saves around $3,000 in taxes just for moving around the timing of charitable donations. Here is a helpful chart showing the benefit of charitable bunching from the Stark Community Foundation:

Using a donor-advised fund and charitable bunching work really well together. By bunching your donations into the DAF into a single year, you can get more of the value of itemizing the donations and getting a tax deduction. But then you can keep some of the money in the DAF to distribute during the other years, so you can offer consistent annual support that the organizations can count on each year and still be able to respond to requests for donations any time.

A third powerful tool is to give long-held appreciated stocks or other investments held in a taxable account to 501(c)(3) charity. These gifts have the same benefit to the charity as giving cash, because the charity can sell the security and use the funds to further its mission. But you get an extra tax break by donating this way because you’re never taxed on the unrealized profit. To illustrate, let’s say you bought $1,000 of stock in 1980 and now it’s worth $11,000. If you sold the stock before donating, you’d have to pay capital gains taxes on the $10,000 profits you made and only have a smaller amount left to donate. But by donating the stock directly, you get to deduct the full $11,000 without having to pay any capital gains taxes at all. Since the charity is tax exempt, it doesn’t have to pay capital gains taxes either. The tax liability just *poof* disappears when you make the gift! You can read more in the charitable hack that saved me thousands in taxes and increased my mindfulness.

People who have retirement accounts like IRAs and 401(k)s are usually required to start making taxable distributions from those accounts each year once they turn 72, whether they need to use the money or not.* Normally, they owe tax on these required minimum distributions (RMDs), but if they want to donate to charity, they can potentially avoid this tax by making Qualified Charitable Distributions (QCDs) from their retirement account directly to the charities they want to support. This technique is *not* combinable with donor-advised funds since QCDs can’t be made to DAFs, but it can help lower taxes for seniors who don’t itemize every year or who have to pay extra in Medicare premiums because of how high their incomes are.

*This rule was paused for 2020 because of Covid-19.

For those who usually give or will once give a tax-deductible amount that is a high percentage of their annual incomes, it’s important to understand a rule that generally limits the deduction one may receive for the donation of appreciated securities to 30% of adjusted gross income (AGI). This typically arises for people who have inherited wealth, sold a business, or otherwise have a significant amount of wealth relative to their income in a specific year. For those brushing up against this limit, it’s typically prudent to analyze whether to shift some of their donations to a few years in the future, from stock back to cash, to realize that rolling over to the next year is fine in their situation, or to not worry so much about the deduction and use it as an excuse to focus more on political giving. It gets pretty technical to weigh all of the considerations, we recommend getting professional help if this issue is relevant to you.

There are many tax considerations and understanding some of these techniques can create additional savings which you can use personally, give to the causes you care about, or perhaps a combination. If you’d rather avoid thinking too much about the taxes, that’s okay too, paying taxes supports many good things.

Tying it all together

  • Give generously, meaningfully, mindfully prudently, and tax-efficiently!
  • Talk to friends, family, colleagues, and people whom you admire about how/where they give.
  • Don’t wait for the perfect system, get started!
  • Learn and grow. Like anything, the more you work on this, the more you’ll develop a flow. Over time your views might change, that’s a sign of growth and wisdom.

Charitable giving: A five part series on more effective philanthropy

Photo by Elvert Barnes

How can I make giving more meaningful? Charitable planning guide: Part four

So far we’ve talked about why you should give, how much you should give and how to choose the organizations you donate to. That’s enough to get you started in your giving program, but how can you make your charitable activities more personally meaningful?

Create a ritual for charitable giving

Simply increasing your donations won’t do it. The exact amount of money we give away doesn’t necessarily define how meaningful it feels. However, the rituals we use can make a big difference. Most good rituals have a beginning, middle, and end.

Charitable giving: A five part series on more effective philanthropy

If you do (or will start doing) most of your giving once a year, consider setting the context so you’ll be more mindful. You might start by reading an intention. Something like:
“Here I sit, in recognition that the world is broken and that I must help to repair it, that I have more than I need, and that others have less. I will do my duty to use what I have to repair the world and meet the needs of others as I can.” You could listen to a piece of music or even eat a special food. What symbolizes the values you hope to feel present with you? Perhaps you have never articulated quite why you give, what problems you see, what capacity you have to address them, or why you think you should. If not, maybe it’s worth doing some exploration of that. Maybe you explore through conversation, reading, art, or some other way. However, you explore, giving will be more valuable as you develop a vision for it and consider your why.

Start the ritual in a way which marks it off from normal life (reading, candle, music, whatever), then do your decision-making and execution, then bring it in for a close by creating a last part of the giving process before re-emerging into the everyday. Perhaps you light a second candle, play a different piece of music, read a different intention, sign a song, walk around the block, eat a special food, or make a certain movement. Whatever it is, it will help you demarcate the end of your giving ritual.

Bring your creativity to designing your ritual. It should use elements which you find meaningful whether from your family, your faith tradition, or something from your own story. We love helping clients identify something that fits into their family rhythms. For instance, some of our clients light shabbat candles every week so we helped them decide to take a moment before they light the candles to think about issues or suggestions of giving ideas that came up during the week and write them on a running list they kept nearby (but not too near!) the candles.

If you want to make decisions with a partner, friend, or family members, perhaps after the pandemic, schedule a nice meal at a restaurant to discuss it. Order dessert to associate the happy memories with the good work. Or during the pandemic, perhaps this is a good excuse for a phone or zoom call with a little more content to help you connect one-on-one with people you care about.

Do you need a ritual? Of course not! But it’ll probably help the experience be meaningful. If you don’t have one, that’s okay too and it should definitely not keep you from starting. Start and then figure it out in a future year.

Also, consider who you want to be engaged with on these issues. If you have kids you might also consider how to include them. One of the best teaching tools is modeling what you hope your kids will learn. Knowing you’ll need to explain your decisions to your kids over time might also help you make more generous decisions. Ron Lieber, an exceptional finance writer, wrote The Opposite of Spoiled which covers many questions about how to talk about kids about money, including giving. It’s well worth reading.

You might also consider the idea of a giving circle or other participatory philanthropy options. They can be structured in a lot of different ways, with varying levels of formality. One method is that people come together, commit to giving money (different amounts or all the same), and work together on researching/deciding but then write their own individual checks along with a group cover letter. Another model is to actually pool money together and then decide as a group which groups to donate to.

A third model is to work with groups like D.C.’s Diverse City Fund, where donors delegate the actual decision-making to a grants team made up of people from directly impacted communities rather than the donors deciding how much to give to whom. There is a very powerful idea built into this model. Just because people have been endowed with resources by an unjust society doesn’t mean they should get to decide the best use for those resources. Our lived experience strongly influences which issues we know and care about. In this view, people who are part of the communities most impacted have lived experiences that better prepare them for making those decisions.

Action steps

Your charitable giving will become more meaningful if you create a ritual around it. Consider establishing a special time and place to make your gifts. Add a small speech or prayer, reading, music, candles, or any other enhancements that will create a special place for reflection and thereby make your choices more meaningful.

Involve your children if you have them. It’s never too early to make charitable giving a part of life.

Consider joining a like-minded group of people who will help you explore charitable giving opportunities and share insights and experiences.

Charitable giving: A five part series on more effective philanthropy

Photo by Elvert Barnes

Who should I give to? Charitable planning guide: Part three

Up to now we’ve talked about why you should give and how much of your income you should ideally think about donating [link]. Now we get to the fun part. Deciding which organizations deserve your money.

Finding the most cost-efficient charities: Effective altruism.

One way to choose the charities you want to support is to follow the views of the Effective Altruism movement and aim to identify the most efficient ways to directly save lives and improve their quality. For instance, a few dollars can buy a bed net and likely prevent someone (or several people) from getting Malaria. That’s a very low-cost, high-impact intervention.

In the effective altruism analysis, we don’t necessarily focus on charities nearby. Because people’s lives are just as important no matter where they live, we shouldn’t assume that the best place to give is right where the donor happens to live. It is a lot more expensive to save lives in the U.S. than it is in developing countries, and international public health efforts tend to be much more effective when measured by the cost to save a life. As a result, international efforts tend to be a big focus for effective altruists.

There are many organizations who evaluate charities with an EA approach, for instance, Give Well. I find this approach compelling and it is one of the reasons I’ve been giving to Project Muso since the organization’s founding. Project Muso has radically improved health outcomes in Mali, reducing the infant mortality rate by the greatest rate ever recorded in a peer-reviewed study. It has been the biggest share of my giving most years since it was founded in 2005. Ari and his partner give one of their largest gifts each year to Doctors without Borders for similar reasons.

As effective as some direct service organizations are, though, they primarily mitigate the downstream impacts of imbalances of power and wealth, rather than changing the fundamental structures that give rise to health and income inequalities. In light of this, many donors are increasingly looking “upstream” by giving to organizations that fight to change the laws and policies that give rise to poverty and poor health to begin with. An example of this is giving to political candidates who promise to change how government works, for example by instituting more progressive taxes, higher minimum wages, more robust safety net services, and increased access to free, public healthcare or education. Advocacy organizations also fit into this model. For instance, organizations may mobilize voters, lobby government, organize activists, or even do research that influences laws and policies. I find the advocacy approach very persuasive and so give significantly to advocacy groups and progressive political candidates.

Advocacy organizations have the potential to dramatically increase the impact of your giving. Because local, state, and national governments have budgets in the trillions, influencing even a small portion of these budgets can be tremendously valuable. For example, back in 2010, Ari and I co-led an Invest in DC campaign that helped convince the DC Council to raise taxes on very high-income residents and use the money to preserve and expand critical safety net services. A relatively small investment of time (a few hundred hours) and money (a few thousand dollars) in this campaign made by a few hundred people led to tens of millions of dollars being available to meet those needs that year and every year since. The total cost of the campaign was likely under $100,000 but it has generated about $100,000,000 in safety net services (that is a 1000x return)! Even aside from tax and budget fights, policy campaigns like those to raise the minimum wage or fight against wage theft, can similarly drive many millions of dollars directly into the pockets of those who really need the money. While not every advocacy campaign succeeds, the huge multiplier effect of those that do can make them among the highest leverage dollars a person can donate.

Should I give to political candidates or just normal 501c3 organizations?

I do both. Giving to politicians is similar to advocacy. The returns are uncertain, since the politician you support might lose. Or perhaps they get elected, but then fail to follow through on their promises. Or they try their best, but they’re ineffective or get blocked by other political actors. I think about all of those possibilities and try to target my political giving to help politicians who are likely to stick with their values and also be politically effective. But this is an inherently high-variance strategy and you can’t expect every donation to feel like it had a clear positive consequence the way that direct service giving can.

Political and advocacy work doesn’t always (or even all that frequently) produce immediate, decisive, and powerful results. It tends to be an unpredictable march with steps forward and back, ideally more forward than back. It takes vision to stay positive during the setbacks along the way but when it works, the results can be very dramatic. When new people are elected who are able institute positive change, it’s generally impossible to know how much of the improvements can be traced to your own specific donations. But since the changes can be so large, directing millions or even hundreds of millions of dollars towards policy improvements, your donations can have an outsized effect. Even if 0.01% of a change can be traced to my giving, my political giving that year had an enormous impact (or return if thought of as an investment in justice). For example, I have given time and money to many candidates seeking election to the DC Council (a combination of State Senate, State House, and County/City Council all rolled into one chamber). Many of them have lost. But about half have won. Those Councilmembers have helped our city budget a lot more for badly needed social services. Though the increased spending still isn’t as much as I think we should be doing, it’s tens or hundreds of thousands of times more than I could ever have given personally.

Political candidates have a time-based conflict of interest in promoting justice. They tend to focus on winning, quite reasonably. That often means making decisions which maximize voting in a specific election (for them) rather than ones that increase the long-term chances for people who share their values. Some techniques, organizing for instance, tend to help in the immediate term and long-term. Identifying new voters, engaging in political education, and connecting with them as long-term allies is labor-intensive but gets values-aligned votes for decades. By contrast, sending mail to a super-voter might help the candidate get that vote in that election, but doesn’t really change the bigger dynamics. Candidates are incentivized to send the mail, not do the long-term organizing. Although I do support some candidates’ campaigns directly, I try to target most of my support to organizations and campaigns that are focused on building long-term power through techniques like political education, organizing, and movement building, rather than campaigns which mostly dump money into media consultants and short-term name ID boosting like mail, TV, and paid digital. I want people who bring new folks into the process, not just those who want to maximize their share of people who have always voted. If you are looking for a group that helps identify ways to support politically-aligned movement building, learn more about the Movement Voter Project.

What about when friends or strangers solicit me directly?

So far, I’ve been sharing big picture frameworks that assume the goal is to reduce suffering, save lives, improve lives, and other things that are at least somewhat measurable. There are other reasons to give. It’s not always about measurable, efficient outcomes. For instance, when I walked to a restaurant a few blocks away in our neighborhood with my kids (pre-COVID, when this was part of our routine), we’d often be solicited by people in need along the sidewalk. Any dollar would probably be more effective at saving lives if it was invested in bed nets, but we aren’t social justice robots, we are people. While it might not be the most “efficient” use of my charitable giving budget to give to the person in front of me, there was a positive value to sharing this moment with another person and cultivating a feeling of openness rather than needing to close my heart to the need in front of me. I also didn’t want to teach my kids the practice of ignoring someone else’s need and pain by looking away. Actually, my discomfort explaining this inefficiency issue to my daughter when she first asked, hastened my adoption of my current approach. These days I keep several dollar bills in my jacket pocket and when someone asks, I typically give. Not only is opening one’s heart with generosity a good practice, it also models kindness to my kids. It’s a lot better than having to give confusing answers to the tough questions kids ask about why adults do or don’t help people in need.

Similarly, when friends solicit, I don’t get out a calculator to decide how to respond. While a lot of my tithe is committed to organizations I give to consistently every year, I reserve a portion of my gifts for causes supported by people I know. I want friends and family to have a positive experience in mobilizing resources for good in the world, and I’d like to encourage them by being positive and sharing that experience with them.

And that goes double for any young people who reach out. When I was a middle schooler, I got very involved with the Philadelphia AIDS walk. I called adults I knew from my religious community, neighbors, family, and friends. All were touched (or perhaps felt obligated) and nearly every single person I ever asked to sponsor me said yes. Perhaps I was lucky in the community I grew up in–I learned the lesson that when you work for a good cause and ask people to join you, they generally will. I hope young people growing up today learn the same lesson.

I have several set levels of giving. I will generally give:

  • $1 to anyone who asks and seems to be in need (often given directly while in the neighborhood)
  • $36 in response to requests from friends who takes the time to reach out personally about a cause they care about
  • $360 to a cause that I think is important but not a specific focus
  • $720+ a cause which I think is important, efficient, and is a strategic giving priority

Should I give time or just money?

Some people dedicate their lives and careers to social change and as a result have lower incomes and fewer dollars to give or don’t give money at all. They are giving a lot of their life energy and time to the cause through their work. Other people give a lot of money, but their work is less justice-focused. In both cases, people are doing laudable things. You can certainly choose one or the other.

But you don’t *have* to choose one over the other. You can do both. Most of our clients do.

Regardless of your job, you can also donate time. You can knock doors for a campaign, mentor kids, help returning citizens learn job skills, or so many other amazing things. This is valuable too and, as-above, can be combined with a career in the common good and/or committed significant resources to charitable/justice purposes.

Personally, I spend a lot of time working on improving government through electoral organizing and advocacy. Currently, I am the chair of Janeese Lewis George’s (successful!) DC Council campaign. It’s been an incredible experience. I met Janeese before she decided to run for office and helped her think through what a campaign would look like: I helped develop the strategic plan, coordinate the launch, and build the campaign’s infrastructure. So many amazing people joined us along the way. When we hired a staff who managed day-to-day responsibilities, I remained a lot more involved than a typical campaign chair. Janeese was a powerful and clear critic of the failing model of policing, insisting we’d need to re-imagine it. She was attacked with great intensity for her criticism of the out-dated approaches the MPD was using. Despite being outspent by hundreds of thousands of dollars, her moral clarity, capability, smarts, deep community connections, support from volunteers, and powerful message, including personal stories, led to a decisive primary victory against the best funded incumbent in the city. She won the primary election with 55% of the vote and the general election with 92%. Even before she was inaugurated, politics began to meaningfully change. I average around 20 hours per week of work for the campaign for a bit more than a year-and-a-half. It was an intense compliment to my commitments to my family (thanks Becca!) and work (thanks Ari and Bridget!). It has been been one of the most fulfilling experiences of my life.

It’s good to use time to make the world a better place and also resources. You don’t have to choose!

Action steps

Now it’s time to think about the charities, causes, and campaigns you want to be a part of. Think about the work that you want to support—whether it’s distributing food to people temporarily down on their luck, supporting multinational efforts to develop self-sufficiency in poorer countries, fighting climate change, electing better politicians, or donating to the arts. Your priorities should determine which organizations get your money.

Think about giving to political candidates who share your priorities. Remember that even though political gifts are not as certain to have an impact as direct donations, they can have a very large effect when they succeed.

Don’t forget to set aside money for giving to people who ask you—whether they are needy people in your neighborhood or friends and co-workers raising money for their favorite causes.

Consider donating your time and skills along with money. Volunteering is part of giving—and it has its own rewards.

Photo by Elvert Barnes

How much should I give? Charitable planning guide: Part two

In the last post, we discussed why people give to charities—for many reasons, but most importantly because it’s important to do the right thing and knowing you are doing it is fulfilling. So, congratulations if you’re still here. You’ve decided to make charitable giving part of your life. Once you decide to give, the next question is: how much? That’s what we’ll cover in this part of our giving guide.

Essentially you want to give enough that it’s meaningful, but not so much that you impoverish yourself. But for middle-class and wealthy people, that is a wide range! How do you narrow it down?

Tithing isn’t just for Sunday school

One of the oldest solutions to this problem is to “tithe.” In this system, people give away a tenth of their income (or in some cases wealth). It is easy for many of us to calculate (taking 10% of a number is much easier than say 7% or 13%). It has been thousands of years since people developed the base-ten system and tithing is still practiced widely today, especially by Christians and Jews, but also by the adherents of many other religions as well. At some level, 10% is arbitrary, but it is a great example of an important strategy: setting a clear measurable giving target. Having a specific, percentage-based goal is really helpful. Even if the specific target feels arbitrary, the process is intentional and allows you to recalibrate over time. With each iteration, you get more and more exact. I will use tithe to describe an approach to giving where someone sets a percentage-based giving target, even if it’s not necessarily a 10% target, and then strives to meet or exceed it.

In my family, we aim to give away at least a tenth of our annual household income. I have been using this approach since I was in my early 20s. Having a proactive plan with a specific target works for us and I recommend it to others for a few reasons:

  • It makes it easier to give happily rather than grudgingly. For instance, because we budget a certain amount to give for the year, every time someone asks us for some sort of donation, it feels like they are helping us meet a goal rather than making it harder for us to afford things we want.*
  • It helps align our giving with our values. Instead of the haphazard way I used to give, we now spend time considering the sorts of organizations we want to support before we consider individual organizations. Having a target encourages thinking holistically about the big picture rather than just deciding whether to give and how much on a one-off basis every time we get a request throughout the year.
  • There are record-keeping advantages that are especially useful to those who itemize deductions at tax time. By putting aside money ahead of time both for my recurring giving and to have available to respond to solicitations, it’s easier to track all of the donations I make throughout the year.
  • It makes it easier to say no to solicitations guilt-free. When an organization that we don’t want to give to and doesn’t need our money asks for a donation (a wealthy elite college, etc), we can say that it doesn’t align with our giving priorities. Because we have budgeted that money for bed nets to prevent malaria, fighting climate change, and other specific goals, it feels much more comfortable to say no to competing priorities.
  • Using a percentage-based target has allowed my giving to grow proportionally with my income. I give a lot more now than I did in my twenties, but it doesn’t feel like a big burden because it’s still a reasonable proportion of my overall income and I have plenty left to pay my mortgage, childcare expenses, etc. So far, this approach has seemed about right, but as my income continues to grow faster than my family’s needs, I’m considering donating a higher proportion of future raises.

*This is partly driven by the behavioral finance concept of mental accounting but it can become literal accounting if you use a separate bank account for donating or, better yet, a donor advised fund. You can read more about that in my piece on how to save thousands in taxes by using donor-advised fund.

What percentage target should I start with?

It’s hard to try to get the percentage exactly right: how would you even know if you did? Fixating on identifying the perfect number could stall your momentum and keep you from starting at all. 0% is the wrong number so don’t let a thirst for precision lull you into inaction! The most important thing at this stage is setting an initial target and getting started. You can change it anytime. It’s just an initial try, so it’s low stakes. Start with an easy experiment. Pick a number: 1%, 5%, 10%, 12%, or another. Try giving that amount away and see how it goes.

Many years ago, when I started working at SEIU, I started bike commuting for the first time. I was the lucky recipient of a green Trek 720 hybrid from the early 1990s. I wanted to know the proper height for my seat so I asked an older, wiser, hipper colleague (I think he was 24). Dave Sachs was a hardcore bike enthusiast. He simply said, “every day, raise it a bit. Eventually, it’ll be too high. When that happens lower it down a bit and it’ll be perfect.” I was disappointed, since I was hoping for some algorithm that included inseam length, a Greek letter constant, and such. In time, I found this was one of the wiser rules I ever learned. That concept has stuck with me ever since and it applies well to the question of giving. Every year, raise it up a bit. Should it ever get too high, drop it a bit. The most important thing isn’t getting the perfect number, it’s to start the process. *Any* number will do. If you are stuck and need a little more help, just give 1% more than the year before each year until it starts to feel like it’s too much.

Ari often thinks of this gradual ratcheting process as analogous to weight-lifting. It’s a terrible idea the first time you go to the gym to try to bench press 400 lbs. That’s a recipe for disaster, or at the very least a painful muscle strain. It’s better to start with something you know you can do and gradually build up your muscle and confidence over time. By starting low and increasing the target a little bit at a time, donors also can “build their giving muscle” over time. As they gain experience, they get better at evaluating potential organizations to support and also learn more about what level of tithe is sustainable for them and their families. For more ambitious givers, the metaphor also extends to the idea that if you’re not “feeling the burn” at least a little bit, it’s probably time to increase the level some more until you do.

Whichever metaphor you prefer, one helpful practice for increasing your giving over time without having to make painful cuts on your current spending is to consider committing to give ⅓ of any raise you get to charity, save ⅓ for retirement or other goals, and spend the remaining ⅓. Behavioral economics research on budgeting shows it’s a lot easier to avoid lifestyle creep by keeping your spending where it is than it is to have to cut your existing spending.

I set my percentage but what is it a percentage of?

Terrific, you have your percentage! But wait, what is it a percentage of? My target is 10% and I apply it to my adjusted gross income (AGI) from the previous year. This approach is easy to implement since most of us can reasonably quickly access the information about how much we earned last year via our federal tax returns (currently, AGI is on line 8b each year). I don’t exclude my tax payments because taxes, as FDR said, are the price we pay for living in an organized society. They help pay for many services I benefit from (libraries, schools, social security, fire fighters, etc), so paying taxes is really separate from the spiritual/ethical/religious obligation to give intentionally, generously, and without compulsion.

Another advantage of using AGI is that it excludes income that I save in “traditional” retirement accounts like IRAs or 401(k)s. These funds won’t be readily available to me or taxed until I retire, and I want to be able to keep giving substantially in retirement as well, so it makes sense to tithe them in retirement, at the same time that distributions from these accounts will start showing up in my AGI and getting taxed. It will probably be quite a lot more in the future. 🤞

In my case, most of my financial resources are earned via working, so tithing based on income is an obvious solution. But many of the clients we work with have inherited significant amounts of money. Inheritance raises the question of whether to give away wealth in addition to income. For some people, the goal is to divest themselves of what they see as unearned inherited privilege. For some, the goal is to address certain needs for their own family (such as the down payment on a house, ongoing support, education expenses, or perhaps beyond that) and then give away the rest. Some people want to give away all inherited wealth within a few years and some people want to give away income but maintain the principal for future generations and perhaps aim to see it grow significantly over time.

It’s a tough balance to know how much to give and how much to preserve. We have worked with clients and spoken with friends who are all good and thoughtful people and end up taking very different approaches. I wish I could share one perfect answer with everyone wrestling with these questions, but deciding which approach is the right one for each of us, is deeply personal and so the right answer is specific to each person’s situation. Coming to the right solution for you means engaging with complex emotions and hard moral questions. It also probably means planning for important tax and other technical considerations. We work with clients on this all the time–it’s one of the major focuses of our work at Values Added.

What counts?

People choose different approaches to determine which donations to count toward their tithe and which don’t. Some people don’t count a membership in a religious organization or NPR because they get some personal benefits from their membership, but others do count these memberships because they’re still voluntary donations that help support something good in the world. Some people only count things that directly help the poor and so would exclude their opera donations. Some people count donations to political campaigns while others don’t.

The IRS has a set of rules for what counts as “tax-deductible,” but those rules don’t perfectly map onto anyone’s definition of justice or helping people in need. Lots of 501c3 do great work and help people in need, but many are focused on other things. For example, I don’t particularly think that donations to the United States Dressage Federation, which helps coordinate horse dancing, helps to advance justice in the world. So IRS tax-deductibility probably shouldn’t be your primary method for determining whether a thing should count toward your giving practice. For me, to be eligible, the purpose should be to make a good faith effort to make the world more just or more comfortable for those in need. The project can accomplish that through direct service, advocacy, politics, or any other plausible theory of change. Other uses of money may be good things to do too, but I wouldn’t count them myself. Your goals might be different. I, for instance, don’t really focus on giving to support arts and cultural organizations, but I think a person could believe that art is its own good and want to support cultural endeavors for their own sakes and to make them more accessible to people who can’t pay for tickets to a museum or theater. I have many friends who take this approach and I value it very much. Once you set your goals, think about whether specific organizations meet them or not and use that information to decide whether it counts. I tend to worry more about intent than about outcomes when deciding whether a use of money is eligible.

How should I keep track?

Now you have a tithing target and a sense of what to measure toward your tithe–that’s a lot of progress already! A target works much better if you keep track (specifically or generally) of whether you are meeting it. That’s pretty easy too, you just need to make a note when you give something that should count as charitable giving (or “investment in justice” or whatever phrase works for you). Do it in a way that is easy for you to keep up with (since a great system you don’t actually keep up with isn’t a great system!). Personally, I keep a spreadsheet all year to track distributions. Every time I make a contribution to a charity, political candidate, etc, I enter the total, date, cause, and any additional notes. I made a sample giving spreadsheet for informational purposes and you can check it out, make a copy of that one, use it to build your own, or just build your own without it. Some people also like to add a column for the gifts they plan to make each year and then check off a box when the gifts are actually made.

Action steps

Now it’s your turn. Think about a percentage of your income that you’d like to allocate towards charity. Don’t obsess about the perfect number. Try one and see how it goes. Then start keeping track of how much you give—whether in a spreadsheet, a notebook or some other way that makes sense for you.

Photo by Elvert Barnes

Charitable giving: A five part series on more effective philanthropy

As the year approaches its end, lots of people begin to think about charitable giving. Unfortunately, this means that many people are rushing around trying to cram a year’s worth of giving back into one of the busiest months of all. If this is you, maybe it’s time to consider developing a well-planned, strategic, year-round approach to charitable giving.

Trying to cram it all in at the last minute can be unpleasant. I’m speaking from personal experience. I used to procrastinate and procrastinate on charitable giving (you may recall this if you read the charitable hack that saved me thousands). I’d put off charitable giving all year and then, finally, when the deadline was imminent, I’d get around to giving on December 31st, usually well into the evening. When friends were hosting/attending parties (remember parties? lolsob) or out on some terrific adventure, I’d be making online donations. Usually, my credit card would be shut down by the fraud prevention department. I could have been having a festive drink, but instead I was on hold waiting to plead my case for re-activating my credit card to give some more money away. It was a crazy way to do it, but it got resources to organizations that used them to make the world better and it was okay. In the years since, I’ve developed a lot more thoughtfulness and proactivity around how to approach giving. I’ve gone from being rushed and reactive to peaceful and proactive. Instead of a chore, it’s a process that opens my heart and builds gratitude. I’d like everyone to feel that way–hence this guide!

By now I’ve worked with hundreds of families around developing charitable giving plans and executing them. As we approach the end of 2020, I’d like to share what I’ve learned and to help you build a charitable giving practice that is mindful, tax-efficient, effective, and fun. I hope you’ll join me by suggesting improvements, new topics to cover, and sharing this with those who might find it useful so we can all do better together.  

I’ve organized this guide into five easy-to-digest blog posts. This first one will cover the most basic, fundamental question: why give at all?

Why should I give?

But first let’s address the question that makes all the others relevant. Why should anyone give money to charity?

Well, to start with, you might belong to a religion that requires it. Or your own moral analysis might demand it. You may have friends that do it and make seem like a good idea. Or it might be part of a spiritual practice you have developed. We live in a broken world and fixing it requires all of us. Perhaps you have had more than your share of privilege and want to give back? For me, it’s a combination of all of the above.

Giving also makes us feel great. There is a lot of research that giving money away is an important driver of fulfillment. Here is an overview: Can Helping Others Help You Find Meaning in Life? The research on spending/happiness shows something unintuitive to most of us–giving generously brings far more satisfaction than when we spend money on ourselves (Giving Really Is Better than Receiving). Regardless of why you give, you’ll find that if you do, you’ll feel happier and more fulfilled.

For me, giving comes in part from the recognition that what I have is not a fair representation of my worth or my accomplishments. Some people have an easier time acquiring wealth for any of a variety of reasons (race, gender, class, family, genetics, education privilege, etc). Our culture trains us to think that if we have something it is because we deserve it and if we lack for something, it is because we don’t deserve it. This common way of thinking is terribly destructive and unjust. Critiquing the idea that rich people deserve what they have and that the poor deserve to be poor is not some new leftist thing. The critique extends back at least to the Hebrew Bible. Psalms 24:1 objects with the greatest fervor to the idea of ownership and says that we can’t really own anything! In the Psalmist’s view, the world and everything within it is God’s. In this view, we don’t own things, we are just stewards. I often ask myself how my choices with money would be different if I embraced this way of thinking. But there is still a part of me that holds onto the idea that I work hard for what I earn and I deserve some benefit of my effort. This guide is tailored especially for those who feel pulled in both directions, including those who feel closer to one end or the other of the spectrum.

Action steps

As an essential first step of charitable planning, I’d ask you to think about your own reasons for giving. What do you hope to accomplish? How do you want to feel? How do you think it will affect your life? Your answers to these questions should guide all the rest of the decisions you’ll need to make in the four blog posts that follow.

Photo by Elvert Barnes

The charitable hack that saved me thousands in taxes and increased my mindfulness

For much of my adult life, every December 31st I’d fall into the same trap. Around Thanksgiving, I’d remember that I was supposed to do my charitable giving for the year. I’d think about how meaningful it would be, how much of a difference it would make, how carefully I’d choose the organizations, how my ritual would work and then, well, I would get distracted and do something else instead. Then, I’d lose the thread, get busy and finally, on December 31st, staring the deadline in the face I’d spring into frenzied action. I’d simplify the plan, whip out my credit card and get to work. In the frenzy, at least one of my credit cards would usually get shut down for suspected fraud. You’d think they’d be hip to the pattern that I gave a lot of money each 12/31 but the credit card companies didn’t seem to catch on.

Are you sick of the end of year frenzy for your charitable giving plans? Tired of sacrificing family time on December 31st to make charitable contributions at the last minute that feel impulsive and unplanned? We have a solution for you! You should consider creating a Donor Advised Fund (DAF) that will allow you to make charitable giving meaningful, easy and enjoyable. Not only that, it may save you thousands in taxes.

It has transformed my giving from frenzied to mindful and it’s saved us a lot of money on taxes too. This is a powerful tool and I hope it helps you as much as it has helped me.


What is a Donor-Advised Fund (DAF)?

DAFs are administered by nonprofits like Community Foundations or Schwab Charitable. They function like your own personal foundation but are much cheaper and easier to operate. To participate in a DAF, you open an account and donate stocks, mutual funds, or cash to the fund. After that, you can recommend grants from the fund to nonprofits of your choice, but you can’t withdraw the funds for your own use. Until all of the funds are used for grants, they can be invested and grow (or shrink) as with other investments. 

You get a tax deduction in the year you donate to the DAF, regardless of when the grants to nonprofits are actually made. This allows you to make donations in the years that are best for you for tax purposes while allowing the charities to still receive consistent gifts every year (or whenever you like). DAFs can also make tax time a lot simpler because you can just report occasional big donations to the DAF and don’t have to track every single individual grant from the DAF to charities. No more digging through statements to find your charitable deductions or having stressful marathon giving sessions on 12/31!


Who should consider a DAF?

If you give (or plan to give) significant support to nonprofit charities, you are a strong candidate for a DAF. DAFs are particularly beneficial for donors who sometimes itemize their charitable contributions and for those who have appreciated stocks in their investment accounts. The more charitable you are, the more a DAF is likely to help. 

Even if you plan to give smaller amounts after the initial contribution, using a DAF may still be a good idea because it helps make charitable giving meaningful, easy, and enjoyable. Aside from the tax benefits discussed below, DAFs can cut down on junk mail, help nonprofits avoid paying credit card fees, and help systemize your charitable giving.


How can DAFs save money on taxes?

Let’s say you buy ten shares of stock for $1500 and, over a few years, they grow in value to $3,000. If you sell them, you’ll have to pay long-term capital gains (LTCG) tax on the $1,500 it increased. If your long term capital gains tax rate is 15%, then you’d owe $225 (15% of $1,500) in federal capital gains taxes.

If you donated the $3,000 worth of stock to a DAF or another charity, you can get the same $3,000 tax deduction as if you had donated cash and you’d avoid paying that $225 in capital gains taxes (and likely state taxes as well). That’s why we often recommend setting aside the stocks with the largest capital gains to contribute to a DAF. We’ve helped clients who donate a lot to charity reduce their taxes by thousands of dollars this way. 


For whom is this strategy a bad fit?

When donating stock to a DAF, the tax deduction is taken upon the transfer of stocks to the fund, not when the money is distributed. This deduction is limited to 30% of your Adjusted Gross Income (AGI) so everyone, including people using DAFs, should be careful when planning to make donations that would exceed this limit. Though the excess can carry over to the next year, people who otherwise would take the standard deduction that year may lose out on the benefit. 

If you always take the standard deduction, a DAF can be useful for record-keeping and administration, but it probably won’t reduce your taxes. 

Many people prefer to give to political parties, political candidates, 501(c)4 campaigns, or other organizations that can’t receive tax-deductible donations. DAF administrators won’t approve requests for distributions to these types of organizations, so donors should make these contributions directly instead.


What does it mean that I may “advise” on donations?

For compliance and legal reasons, the donor of a donor-advised fund “advises” the DAF on how to distribute the money. Technically, the donor is just an advisor and can’t force the DAF to make a particular grant. But, in practice, it is extremely rare for a DAF administrator to deny a request to distribute money to a properly registered nonprofit charitable organization. It sometimes takes a few days for the DAF administrator to confirm the IRS status of the organization, but we’ve never seen a denial of a grant to a 501(c)3 charity. 


What are some common issues with implementation?

DAFs often require initial contributions of $5,000 or more. Several major DAFs like Schwab Charitable or Fidelity Charitable currently charge annual administrative fees of $100 or 0.6% of assets and offer low-cost index fund options for investments. It’s important to check both the administrative fees and investment fees the DAF charges to be sure they’re reasonable. Because the administrative fees include the DAF sending charities checks, using a DAF with reasonable fees can allow you to have an even bigger impact than donating by credit card since it can save charities the 2%-4% they would otherwise pay for processing credit card donations.


What should I do if I have questions on this subject or I am not sure about how to use it well?

This strategy is best evaluated in the context of other investment and tax management strategies. Of course, as with all material on this site, this article is for informational purposes and isn’t advice. Given the complexity of the tax system and investing, it’s typically wise to consult a fiduciary financial advisor with the relevant expertise in taxation, investment, estate planning, college funding, student loan management, and other related areas. We think about these issues all the time and would be happy to connect with you about your questions–just reach out!