For more information about Betterment’s charitable giving service, see the overview here.
There are many reasons why an individual might be motivated to give money or time to a charity: It can have physical and social benefits, it can improve your sense of well-being, and it’s helpful to others.
But there’s another one that can’t be overlooked: It’s a good tax deduction, says Darrin Cohen, CFP®, founder and CEO of an Atlanta-based wealth management firm.
The phrase ‘charitable giving’ encompasses a wide array of concepts and strategies you should discuss with your estate planning team—whether your team consists of just you and your spouse or consists of an attorney, a CPA, and your financial planner. Here’s how you can get started.
1. Give money directly.
This first approach is perhaps the most simple, where you directly donate money, appreciated assets, or write a check (or checks) periodically to the organizations you want to support. If you want to ensure your dollars will have the most impact, you can try Agora Fund’s new platform, which brings the rigor, transparency, and ease of for-profit investing platforms to charitable giving. Platforms such as Agora’s allow you to easily diversify and track your monetary donations.
- Giving feels great, and you receive the immediate gratification of directly giving to a cause you love and support.
- You set a good example and model for your family when they witness your charitable giving.
- You’re in complete control of how much you give at any one time.
- You can get a tax deduction for the dollar amount of your gift on your income tax return.
- By directly donating cash, which is a liquid asset, you lose the future interest-earning benefit of that money.
2. Volunteer your time.
In recent years, the tax benefit of charitable giving is not the only reason people choose to give, Cohen said. Now, people want to also give their time and get involved.
“Many people who volunteer with charities and nonprofits enjoy modeling for their children the act of responsible financial stewardship and giving time and energy to benefit their community,” Cohen said.
- You’re able to make a personal connection with the people who run the organization, as well as potentially connect with the benefactors of their work.
- The experience of working with others is fulfilling.
- You don’t have to have a lot of money to make a difference.
- It’s possible to deduct some related expenses, such as transportation expenses, travel expenses, out-of-pocket expenses that are used for the volunteer work, and uniforms. Betterment is not a tax advisor, and you should consult a tax professional about what expenses qualify under the IRS guidelines. (Read the IRS deduction guidelines.)
- It can be time-consuming to track expenses related to volunteering.
- You don’t always have direct control over your schedule.
3. Establish a trust to give money.
Another more long-term approach to charitable giving is to establish a charitable giving entity. One way to do this is to create a trust to benefit an organization.
- You receive an immediate tax deduction, a potential reduction in capital gains tax, and reduction or elimination of estate and income taxes for your heirs upon your death.
- You create a current or future income stream for yourself or a family member.
- A charitable trust strategy creates options for investment flexibility and diversification.
- A trust typically provides a larger benefit to the charity of your choice than what you might be able to give in a single lump sum.
- Upfront costs include the legal advice and execution of documents when establishing the trust entity.
- Trusts incur ongoing costs, such as the implications of creating a more complex and, therefore, more costly preparation process by your tax preparer.
4. Use insurance as a gift-giving mechanism.
You might also consider charitable giving through insurance—such as naming an organization as the benefactor to your life insurance policy—to generate a future benefit for an organization you support.
- The benefit the charity or nonprofit organization receives is likely to be larger than you could have ever donated to it in cash while you were living.
- You create and maintain a long-term relationship between your family and a college, university, or organization that is important to you.
- You can leave a legacy even after you are no longer living.
- Upfront costs include paying your estate attorney for advice.
- You incur the ongoing cost of the insurance premiums for the remainder of your life.
- You don’t immediately see the fruits of your gifts during your lifetime.
Whether you choose one of these methods of giving or your financial team comes up with other ways, contributing to the organizations you love and support is a win-win for everyone involved.
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