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Financial Planning Advice for Charitable Giving

by whack 1 min read20th Jan 20204 comments

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Hi. I'm interested in donating ~50% of my lifetime disposable income. For context, I'm a salaried professional making mid-6-figures. I've lately been thinking about this, and realized by accident that there are many nuances to my plan that I'm not very knowledgable on. Such as:

1. I had originally planned to donate most of it directly from my 401k savings, in order to minimize taxes. I just realized however, that the IRS only allows "direct giving" on IRAs, and has a 100k limit as well

2. I also realized recently that there is a ~20-50% cap on the tax deductions you can claim per year, for charitable giving. In isolation, this seemingly benefits amortizing my donations over many years.

3. On the flip side to the above, because of the recent SALT cap in the tax bill, I wouldn't be getting any tax benefits for the first $14,000 in donations that I make every year. In isolation, this seemingly benefits lumping together my donations into a handful of tax years

I would love to hear others' advice on the most tax efficient way to handle the above. But that is actually not the main reason for this post.

More generally speaking, I've come to realize that I may have other financial blind spots that haven't occurred to me yet. Are there any articles or discussions or forums that are focused on the financial-planning aspects of making 5-6 figure charitable contributions?

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3 Answers

A few US-centric notes.

The 60% limit only applies if your entire donation is in cash, otherwise the 50% limit applies.

If you have it, you should probably aim to donate 30% of your AGI in taxable appreciated shares held one year or longer, and 20% in cash. You receive a tax deduction equal to the fair value of the shares, but don't pay capital gains taxes on them.

Donations in excess of the limits can be carried forward for up to 5 years. Although current year donations take precedence over using up the carry forward amounts.

You should donate shares with the greatest percentage gains, and use shares with the smallest gains, or largest losses, for personal expenses.

You should avoid realizing capital gains unnecessarily.

Don't invest in an all in one fund. The more fine grained your assets the better as each asset has separate gains and losses. Although investing in 100 different stocks, as some of the robo advisors do, might be taking things to far.

You should bunch donations in particular years to reduce the dilution of the standard deduction on the charitable deduction.

You can use a donor advised fund to decouple tax management from giving.

At age 70.5 there is something called a Qualified Charitable Distribution from a traditional IRA of up to $100,000 per year. This avoids taxes and counts towards the IRA Required Minimum Distribution requirements.

401(k)'s can be rolled over into traditional IRAs.

If you receive a windfall you should donate substantially in that year in order to reduce taxes.

Welcome to the EA Forum! Kudos to you for your generosity! You’ve probably already joined Giving What We Can, but you may also be interested in Bolder Giving (giving high percentages, but not focused on effective giving).

Since you can deduct state taxes and interest on a mortgage, I would guess you are already exceeding the $14,000 standard deduction. So then I think it would be important to donate every year to make sure you are saving taxes on the money you make in the top bracket. Here is a post that might be helpful. There are also quite a few posts (e.g. this recent one) on investing with an EA mindset.

In case it helps, in the US you should be able to deduct up to 60% of your AGI for cash donations. https://www.investopedia.com/articles/personal-finance/041315/tips-charitable-contributions-limits-and-taxes.asp