In 2015, Americans gave more to charity than in any previous year. On average, we gave more than $1 billion to charity every day last year. And it wasn’t just huge donations either—more people gave to charity than voted (I’m not sure which way this one cuts, though).
From a financial planning point of view, charitable giving can be both an important priority in someone’s life, as well as a powerful tax planning tool. From a tax-planning perspective, charitable giving is interesting because you’re essentially getting the opportunity to direct a portion of your taxes to the organization(s) of your choice. Since you can deduct the value of your charitable gifts from your taxes, you’re essentially only paying for 2/3 of your donation (depending on your tax bracket).
I don’t want to overstate the power of this, though—you’re not going to make money from charitable donations. This isn’t one of Kramer’s write-offs. But you can improve your tax situation through charitable donations you were already going to make.
Since the impact of your deductions is based on which tax bracket you’re in, when you make your donations matters. Ideally, you want to give more when you have more taxable income. This can be as simple as holding off your end-of-year donations until after New Year’s if you think you’ll make more next year, or it can involve more complicated solutions such as a donor advised fund.
Just like everything with taxes, it starts out (moderately) simple, but can get really complicated, really quickly. If you’re interested in learning more about how a financial advisor can help you with charitable giving, tax planning, or anything else, take a look at our ebook “The Value of Financial Advice.”
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