Generosity abounds this time of year. For businesses large and small, philanthropy should be part of your year-round company culture rather than a once-a-year event. It doesn’t have to cost a lot and can pay big dividends in terms of company morale and reputational enhancement. But philnathropy isn't just a business strategy, it's also a personal expression.
As your accountant has surely mentioned, opening your heart and wallet to those less fortunate can not only give you a warm feeling, it can help lower your tax bill. With tax reform not totally settled and considerable uncertainty regarding what contributions will be deductible next year, some charities, like the Greater Milwaukee Foundation, are encouraging donors to be extra generous this year.
Things to Consider Before Donating
- Tax Efficiency—Consult your accountant or tax preparer before making a donation to ensure you’re maximizing your deductions
- Distribution—Determine whether you want to gift on an annual basis or set up a plan to contribute monthly or quarterly
- Recognition—Do you want public credit for your generosity (which is likely to lead to more solicitations from other charities) or remain anonymous?
- Legacy—Is this gifting in line with your estate plan?
Choosing the Right Charity
In addition to maximizing the tax benefits, you’ll also want to do some research to make sure your gift will be used as intended. Make sure you are donating to a bona fide, tax-exempt 501 (c)(3) public charity. Review the charity’s finances and determine how much of your donation will actually go toward the cause you want to support. Charities or non-profits with excessive executive salaries, expensive fund-raising efforts and significant overhead, often have little left over for the actual work they are supposed to do.
A great place to do this kind of background check is Charity Navigator which uses an objective, numbers-based rating system to assess over 9,000 charities.
Reducing Taxes Now, Gifting Over Time
If you know you want to be philanthropic but aren’t certain which causes to support, a donor advised fund (DAF) might be a good option. DAFs allow a donor to make a charitable contribution and receive an immediate tax benefit, and then direct grants to be distributed from the fund to specific charities whenever the donor chooses. The National Philanthropic Trust compares them to a charitable savings account. You can make a donation and get a tax benefit this year and then take several years to actually distribute that gift, which is invested and grows tax-free in the interim.
There are close to 300,000 DAFs to choose from and how these funds will fare after tax reform remains to be seen, but for the current tax year, they still represent an important option. The largest is the Fidelity Charitable Gift Fund which attracted some $4.1 billion in 2016 alone. In addition to Fidelity’s offering, there are options available from many other well-known names, including Pew Charitable Trusts, Vanguard Charitable Endowment Program, National Philanthropic Trust, and Goldman Sachs Philanthropy Fund.
The Rewards of Giving
Although “it’s better to give than to receive” is a cliché it’s one backed up by academic research. A study from Harvard Business School found that although more research needs to be done the act of giving or spending money for the benefit of others is more likely to boost your happiness levels but no relationship between spending on oneself and happiness. Among their conclusions was this interesting tidbit: “Happier people give more and giving makes people happier, such that happiness and giving may operate in a positive feedback loop (with happier people giving more, getting happier and giving even more).”
Getting happier by helping others—and saving on taxes, too—sounds like a perfect cure for the seasonal blues.