Much like the rest of your financial goals, you should have a plan set in place for your giving to charitable causes and organizations. In fact, advisors recommend you have a clear understanding of how your donations will align with your values — and also be the most tax efficient.
While individuals can reap noticeable tax benefits with the appropriate giving strategy, financial advisors say there are widespread misconceptions that tax deductions will help donors break even, so to speak, when giving.
Autumn Knutson, founder and lead financial planner at Styled Wealth, said she has even seen some instances of people believing their donations will result in a monetary net positive.
“[A] misconception is people think they may be saving money period by giving,” Knutson said. “The tax savings does not exceed the amount given. There is a net outlay of cash that you do have a tax incentive for. But you are giving more than you are getting,” she continued.
“If your grandfather put $5,000 in a stock 30 years ago, and now it’s worth $30,000, you can donate that $30,000 in stock, and you don’t have to pay that tax on gains,” Knutson said, explaining certain tax benefits that can be realized by donors.
Advisors Can Help Clients Understand Their Goals
Since the goal is to give, Knutson tries to help clients understand where they want to make an impact – rather than just how they can save.
“I work with impact-driven individuals, so charitable giving comes up a lot. That’s usually a portion of their impact desires. It’s very aligned to ask people what their end goal is: Is it impact driven? Is it for awareness of your brand socially?…What is your goal and what is the primary guiding factor? That can help us make decisions about what we’re going to lean into,” Knutson said.
“That will guide our strategy to inform how we move forward on this giving,” Knutson added.
Amanda Otto, a wealth advisor at Buckingham Strategic Wealth, also said there is a common misconception among potential donors about tax benefits.
“We tell them to give money, if they want to give money to causes they care about,” Otto said.
“We always say, that’s like stepping over a dollar to pick up a quarter,” she said of the mindset that giving results in lower taxes.
Changing Tax Incentives Has Affected Giving Habits
Tax incentives have impacted the level of giving in the U.S., according to findings published in July by the National Bureau of Economic Research.
The study found that charitable giving decreased by about $20 billion annually in 2018, following the passage of the 2017 Tax Cuts and Jobs Act (TCJA), which reduced charitable giving incentives for U.S. taxpayers.
“TCJA was a three trillion dollar policy, and created the largest change in U.S. giving incentives in a generation,” the report said. “Starting in 2018, TCJA induced an extremely large group of taxpayers — roughly 20% of all households — to use the standard deduction instead of itemizing. These taxpayers thus lost their US-tax-code incentive to give.”
Otto also noted that this tax law change had a sobering impact on giving.
“With the tax law change in 2017, a Trump (administration) tax code change, that increased the standard income tax deduction. So for a lot of people, that took away the benefit of giving to a charity.”
Considering Donor-Advised Funds When Giving
Clients often ask Knutson about the best ways they should give — whether it be by check or some sort of account or fund.
Individuals not used to giving on a regular basis or to a certain monetary level typically want advice on how to distribute those funds.
“How does one give, other than ways they have been shown, like an offering plate in church,” Knutson said of common concerns.
To find the best option, she sets out to understand their giving goals.
“What is your scope? Is it 10% (of your income) always? Is it — I inherited this amount and what to give a certain amount always? Or I want to make a one-time donation?” Knutson said. “I talk to them about donor-advised funds. We also talk about (giving via) foundations.”
As far as establishing a foundation, Knutson said that donors would usually consider this step if they have $1 million or more they want to give — and if they want to involve more people, like family members or employees, in their charitable plans.
Foundations also help if individuals want to be able to “donate things outside of cash and appreciated stock, like cars or other items,” Knutson explained.
When DAFs Make Sense
Giving through donor-advised funds (investment accounts established specifically for charitable giving) may be a good option if someone wants to give a large sum of money to multiple causes or they want to delay the distribution of those funds, while still marking them for charity.
“If you have a lot of money now that you know you want to give to two different causes, and you don’t want to give it yet. Maybe you want to see how the leadership goes at that organization,” Knutson explained, naming some scenarios where donor-advised funds may be helpful.
“You can put that money into a donor-advised fund, and still get that full tax benefit for that year. Then you can give out the money over time at your discretion. Or maybe you don’t know where you want to give yet, and you need to do the research, but you know it’s beneficial to report that giving in that tax year,” Knutson said.
Conversely, you wouldn’t need a donor-advised fund “if you’re just going to write out a $20,000 check to one cause or organization,” she added.
A donor-advised fund “gives you an immediate tax benefit in that tax year, and a delayed distribution of the funds,” she said.
DAFs Result in Larger Gifts, Higher Donor Retention Rates
A study of donor-advised funds found that those who gave through these vehicles had higher retention rates as donors, and also made larger gifts, according to a 2024 benchmark report.
The study described donor-advised funds as tax-advantaged charitable savings accounts. It found that more providers were offering these types of funds. According to the study, DAFs provided “lower barriers to entry, such as low- or no-minimum account balances, (and) smaller minimum donation sizes.”
“The tax savings and investment returns of a DAF ultimately result in greatly expanded giving capacity,” the report said.
Of note, the study found that, once a donor started giving through these vehicles, their annual giving increased by 96%. Additionally, DAF donor retention was 15% higher, on average, than non-DAF donors.
Otto shared that she would generally recommend donor-advised funds to an individual “who already has an established record of charitable giving.”
“They are already set in what they are giving,” Otto explained.
“Donor-advised funds can be very helpful in that they’re not as costly as starting a foundation. That can help with charitable bunching,” which is essentially bunching all of your planned charitable contributions into a single year. This can be done to more efficiently itemize those deductions on your taxes, Otto said.
For those earlier on in their giving journey, Otto said that many employers offer matching for employee charity donations.
“I find when reviewing the HR documents for clients when they get a new job…a lot of employers do matching for charitable organizations. That could be a great way to dip your toe in — and your $200 ends up being $400 (to charity),” Otto said.
For more news, information, and analysis, visit the Financial Literacy Channel.
