Charitable Giving: How to Include Giving in Your Financial Plan

Charitable giving is often viewed primarily as a personal decision based on values, community involvement, and the desire to support organizations doing meaningful work. For households that regularly donate, however, charitable contributions can also be incorporated into a broader financial plan.

A structured approach can help donors determine how much they can comfortably give, organize contributions throughout the year, and understand the potential tax implications of different giving methods.

The objective is not simply to give more. It is to make charitable giving sustainable while coordinating it with household cash flow, investments, taxes, and long-term financial goals.

Why Include Giving in a Financial Plan?

Unplanned donations can make it difficult to understand how much a household contributes throughout the year. A giving plan creates a defined budget while helping donors coordinate charitable contributions with other financial priorities.

Protect Household Cash Flow

Charitable giving should generally fit within the household's financial capacity rather than compete with essential expenses.

Before increasing donations, consider emergency savings, housing costs, insurance premiums, debt payments, and retirement contributions.

Establishing a dedicated charitable budget can make generosity more predictable and reduce the likelihood of relying on credit cards or other borrowing to fund donations.

Understand Potential Tax Benefits

Certain charitable contributions may qualify for a federal income tax deduction when the applicable requirements are met.

For individuals, charitable deductions generally require itemizing deductions rather than taking the standard deduction, subject to applicable tax rules and limitations.

The tax treatment can also depend on what is donated, the recipient organization, the donor's income, and the documentation maintained.

A tax professional can help determine how current rules apply to a specific situation.

Coordinate Giving With Investment Decisions

Charitable giving does not have to be limited to cash.

Investors may be able to donate appreciated securities or other eligible assets directly to qualified organizations. This can create different tax consequences from selling the asset first and donating the proceeds.

Understanding the difference can be particularly relevant when a household holds investments with substantial unrealized gains.

Common Charitable Giving Methods

Different giving vehicles serve different financial and philanthropic objectives.

Cash Donations

Cash donations are the simplest form of charitable giving.

Contributions can generally be made by check, electronic transfer, or other payment methods to eligible organizations. Donors should retain appropriate records and acknowledgments, particularly for larger contributions.

Credit card donations can also be convenient, although the donor should still consider household cash flow and ensure the contribution is not creating high-interest credit card debt.

Donor-Advised Funds

A donor-advised fund (DAF) allows an individual or family to contribute eligible assets to a charitable account and subsequently recommend grants to eligible charities.

Depending on the circumstances, contributions to a DAF can potentially qualify for a charitable deduction in the year of contribution, subject to applicable rules and limitations.

The donor generally receives greater flexibility over when grants are recommended, but the contribution to the DAF is generally irrevocable.

DAFs may also involve administrative or investment fees, so donors should review the sponsoring organization's terms before establishing an account.

Appreciated Securities

Donating appreciated stocks or mutual funds can be relevant for investors holding assets with substantial unrealized capital gains.

When eligible appreciated securities are donated directly to a qualified charity, the donor may potentially avoid realizing the capital gain that would otherwise result from selling the investment first, while a charitable deduction may be available subject to applicable rules.

The tax treatment depends on factors such as the type of asset, how long it has been held, the recipient organization, and the donor's circumstances.

Investors should obtain professional tax advice before transferring securities when the tax consequences are significant.

Qualified Charitable Distributions

Qualified charitable distributions (QCDs) allow eligible individuals to make direct charitable distributions from certain IRAs to qualified organizations.

Individuals generally must be at least 70½ years old to make a QCD. When the requirements are satisfied, the distribution can generally be excluded from gross income up to the applicable annual limit.

For individuals subject to required minimum distributions (RMDs), qualifying charitable distributions can also count toward satisfying applicable RMD requirements.

Because QCDs have specific eligibility, account, recipient, and reporting requirements, donors should verify the rules before initiating a transfer.

Charitable Giving and Household Financial Stability

Generosity should be sustainable.

Fund Your Financial Foundation

Before increasing charitable contributions, consider whether the household has adequate emergency savings and a manageable level of high-interest debt.

If a household is regularly carrying expensive credit card balances, paying those balances down may need to take priority over increasing discretionary giving.

Similarly, a donor approaching retirement may need to consider whether contributions fit within the broader retirement-income plan.

Create a Giving Budget

Treat charitable giving as a defined category within the annual financial plan.

For example, a household could establish a yearly charitable budget and divide it into monthly or quarterly contributions.

The appropriate amount depends entirely on the household's income, expenses, financial goals, and personal priorities. There is no universal percentage that every household should give.

Account for Irregular Donations

Giving often increases around holidays, disaster-relief campaigns, fundraising events, or specific community needs.

Instead of treating these contributions as completely unexpected expenses, include a discretionary charitable reserve within the annual budget.

This provides flexibility to respond to important opportunities without disrupting essential household expenses.

How to Evaluate Charitable Organizations

Choosing an organization involves more than looking at a single administrative-expense ratio.

Potential donors can review:

• The organization's stated mission
• Financial statements and annual reports
• Program activities
• Governance and leadership
• Public disclosures
• How donations are used
• Whether the organization is eligible to receive tax-deductible contributions

The IRS provides tools that can help taxpayers determine whether an organization is eligible to receive tax-deductible charitable contributions.

Donors should also be cautious about unsolicited requests and verify an organization's identity before transferring money or providing financial information.

Step-by-Step Strategy for Creating a Giving Plan

1. Set an Annual Giving Amount

Determine an amount that fits comfortably within your household's cash flow.

Review the figure alongside emergency savings, debt payments, retirement contributions, and other financial priorities.

2. Decide Which Assets to Donate

Cash may be appropriate for straightforward contributions, while appreciated securities or other assets may have different tax considerations.

Older investors may also consider whether QCDs are relevant to their situation.

3. Organize Contributions

A donor-advised fund may be useful for individuals who want to make a larger contribution while recommending grants to organizations over time.

Others may prefer direct donations because of their simplicity.

4. Maintain Documentation

Keep receipts, written acknowledgments, transaction records, and other documentation required for the type and amount of contribution.

Documentation requirements can vary depending on the property donated and the size of the contribution.

5. Review the Plan Annually

Income, investments, tax circumstances, charitable priorities, and household expenses can change.

Reviewing the giving plan each year allows contributions and funding methods to be adjusted accordingly.

Charitable Giving and Long-Term Financial Planning

For households with substantial assets, charitable giving can also become part of broader estate planning.

Strategies can include charitable bequests, charitable trusts, donor-advised funds, and other structures. These arrangements can be complex and may have significant tax and legal implications.

Professional advice is particularly important when donating appreciated assets, establishing trusts, making large contributions, or incorporating charitable organizations into an estate plan.

Making Giving Sustainable

Charitable giving does not need to compete with responsible financial planning.

By establishing a realistic annual budget, selecting organizations carefully, maintaining appropriate documentation, and understanding the tax treatment of different assets, donors can incorporate philanthropy into their broader financial strategy.

Cash donations may provide simplicity, while donor-advised funds, appreciated securities, and qualified charitable distributions can provide additional planning options for households that meet the relevant requirements.

The most sustainable giving strategy is one that reflects personal priorities while remaining consistent with the household's cash flow, tax situation, investment strategy, and long-term financial objectives.