Many of us are charitably inclined and take pride in giving monthly or annually to charities. But most of us typically give when we’re asked by a friend or when we set up monthly or annual donations to charities we like. We don’t think too much about how it fits into our bigger financial plan or our values around money. It’s popular to give during times like Giving Tuesday or at the end of the year. However, it can be good to set up or review your charitable giving strategy any time of year. Here are some ideas for how to figure out how much to give and where.
I do get the question often from my clients, “What should I be giving to charity? What’s normal?” If you want the strict answer, one way to determine what’s typical to give is to review the IRS aggregate data online. Charitable giving is a single line item on the tax return, making it easy to analyze the average contribution for those who itemize deductions. The IRS even publishes data breaking out charitable contributions by income level. Of all the tax returns filed, about one quarter of taxpayers are itemizing their deductions and giving some amount to charity. Here’s a summary of the average tax-deductible giving by income level:
|Income Level||Average Annual Charitable Gift|
|Under $15,000||$ 1,550|
|$15,000 under $30,000||$ 2,490|
|$30,000 under $50,000||$ 2,889|
|$50,000 under $100,000||$ 3,454|
|$100,000 under $200,000||$ 4,371|
|$200,000 under $250,000||$ 5,638|
|$250,000 or more||$ 22,484|
Source: IRS Preliminary Data for Tax Years 2017
What this data shows is that generally those who give are donating between 2-11% of their income to charity. Income level is a predictor of how much someone will give, but I suspect that if we had additional data, we would see that in order to figure out whether you give on the low end of 2% or the high end of 11% depends a lot on your values and your other financial priorities.
Someone trying to put three kids through college will have very different priorities than someone about to enter into retirement. Someone working hard to get started saving for retirement and balance paying off student loans will have very different financial priorities than someone who already has funds set aside for their long-term goals.
The interesting thing is at every level of income, people are finding a way to prioritize at least some charitable giving.
What’s Appropriate For You?
Ultimately, you should give what feels comfortable, not what is “normal,” or “average.” Your financial priorities should dictate what you should be giving to charity.
If you’re looking for more structure, one way to think about your budget is via the “50/30/20 rule” 50% of your take home pay should go toward base living expenses (food, shelter clothing), 30% should go toward your lifestyle, travel, and entertainment expenses and 20% should go toward savings goals and debt repayment.
If you’re focused on debt repayment or are just starting out saving for your mid-or short-term goals, perhaps allocating a portion of your lifestyle expenses (a portion of the 30% category) to charity makes the most sense. If you’re at a place where many of your savings goals (short – to – long term) are well on their way to being funded, it might make more sense to allocate a certain portion of your savings allocation (a portion of the 20% category) to charity.
Choosing how much or what percentage out of either your Savings or Lifestyle spending will be an individual decision. I suspect that thinking through how to make the most impact will help you decide how to prioritize the amount of your charitable giving.
How to Make the Biggest Impact
There have been whole scientific studies on ways we can use our resources, such as money to derive more happiness in our lives. In their book, Happy Money: The Science of Happier Spending, co-authors Dr. Elizabeth Dunn and Dr. Michael Norton explore some of their research on finding happiness through our spending. One part of their research focused on giving to others either directly or through charitable giving. Their findings undoubtedly show that when we give to others (time, money, or other resources), we derive satisfaction. When we know the direct impact of what we’re giving, we derived even more satisfaction and happiness. Thus, charitable giving feels best and provides the most happiness and satisfaction when we know who/what we’re helping and how the situation will be improved by our gift. Here are some ideas for maximizing the happiness you get from donating:
- Pair Volunteering With Giving. Consider donating to organization for which you do volunteer work. You can see the impact your dollars have because you’ve served as a volunteer. You end up knowing more about the organization and its programs and administration. Seeing the direct impact connects us more with the good work and helps us feel more satisfied. If you don’t have the money to spare, volunteering alone can be a great way to feel like you’re giving back in a meaningful way.
- Get Specific. Consider donating to a specific program or initiative rather than providing a general donation to an organization. If you are an animal lover, don’t just give to the national ASPCA, give to a rescue program in your current town/county. If you want to fund cancer research, give to a specific cancer research program such as colon cancer, rather than funding general cancer research. You can take it a step further as ask for information or follow-up about the impact your gift had on that particular program.
- Go Local. Give to organizations in your local area to programs you have a connection with or find the biggest need. When you can monitor the success of a program locally you’ll find more satisfaction in your giving.
- Consider the Other Benefits of Giving. When we give we don’t just feel good about ourselves. We may derive other benefits like meeting new people or expanding our network, receiving tax benefits. We may learn more about an important topic or get a break from our normal day-job routines. Below, we talk more about some of the tax benefits of giving.
- Do Your Research. There are plenty of ways to conduct extra due diligence when choosing charities. A portion of every gift will go to administrative costs, rather than programming – this is a natural fact of nonprofit life. However, some organizations do a better job of managing this than others. Organizations like Charity Navigator, Guidestar, or the giving guide called Charity Impact are good places to do some extra research. Knowing how well your favorite charities are doing financially can be a great way to feel more vested in understanding their mission and impact, and thus provide more satisfaction in giving.
Knowing the impact of your financial gift to a charity can help increase the satisfaction you feel. Try using charity rating and research services like Charity Navigator, Guidestar, or Charity Impact to help measure the impact of your gift.
How to Get a Tax Deduction For Your Gifts
Since the tax law changes of 2017 the treatment of charitable contributions has changed. Charitable contributions are only deductible if your itemized deductions exceed the standard deduction. The new law increased the standard deduction to $12,000 for individuals and $24,000 for couples in 2019, and capped the amount of state taxes you can deduct to $10,000 per individual or couple. Therefore, it’s harder for most people to itemize.
UPDATE: The IRS is allowing a $300 deduction for charitable contributions in 2020 as part of the CAREs Act covid-19 response regardless of income or itemized deductions. This special deduction applies to any charitable contribution, it doesn’t necessarily need to be related to covid-19 relief.
Previously if you lived in a high-cost, high-tax area it was easy to reach the itemizing threshold. Now it’s harder to itemize if you’re married and harder if you don’t own property. If you’re single and/or own property it’s a bit easier to reach the threshold assuming you live in a higher cost/higher tax state.
- If your mortgage deduction and state tax deduction already exceed the standard deduction amount than any amount of your charitable gifts will be tax deductible. What this amounts to is about a ~30% or so “discount” on your gift (your actual discount will depend on your state and federal tax rate).
- If your deductions are close to exceeding the standard deduction threshold, then it might make sense to give enough so that you exceed the threshold and can itemize. Only the amount exceeding the standard deduction will give you the ~30% discount.
- If you’re not at all close to exceeding the standard deduction your charitable contributions will receive no discount due to tax savings. That doesn’t mean you shouldn’t give, it just means that you might have to plan a little harder if you want to get a tax deduction.
If you’re in the second or third camp from the list above, it might make sense to batch your contributions in even/odd years. For instance, wait to give your year-end gifts to January of the following year. In January give your prior year’s planned gifts and then you have the whole calendar year to save up for your planned gifts in the present year to be donated before the end of December. Essentially you give twice every other calendar year instead of once every calendar year. This increases the likelihood your deductions are taxable.
No matter the approach you use, always keep a back up copy of your receipts.
What Are Donor Advised Funds All About?
Lately, I’ve been fielding questions about donor advised funds (DAFs) and how to use them. These special funds are a way to supercharge your giving and maximize not only your annual impact, but also your tax deductions.
Setting up a donor advised fund can increase the chances your gifts will be tax deductible and multiply the value of your giving over time. A donor advised fund is a separately titled investment account for which you have control over when you donate and when/who you gift to. All of the grants to charities from the DAF have to be qualified 501(c)(3)s. You can claim a deduction the year you donate to the fund, but send out gifts to charities in a frequency that works for you (annually, every other year, every 5 years, etc.) The money can also grow tax free in the investment account which helps you “stretch” the dollar value of your gifts a little further. Donor advised funds typically make the most sense when:
- You get a bonus, gift or unexpected income and want to apportion out some if it annually to charities but take the tax deduction in one year.
- You have unrealized gains in a taxable investment account or employee stock account. If you donate shares to your donor advised fund you don’t have to sell, pay capital gains, and then donate what’s left to charity. (tip: you can also donate shares directly to a charity rather than a donor advised fund and still get this same tax benefit).
- Your taxable income spikes for a specific reason and you’re looking for ways to lower taxable income while also meeting your charitable giving goals.
There is more complexity and information on how to set up and execute a donor advised fund strategy than can fit in this particular article, so please talk this over with a tax or financial advisor so you get the best results.
There’s a lot to think about here, but hopefully you’ve started evaluating how you can increase the impact of your charitable gifts as well as the happiness you derive from them. What do you think of the idea of defining and aligning your charitable giving with your values and priorities around money?