Charitable Giving Strategies For Young Professionals

Many young professionals I come across are charitably inclined and have funds to dedicate to charitable causes above and beyond their financial goals. This is a discussion of charitable giving strategies available for young professionals, some of the tax advantages associated and when each strategy may be appropriate.

Small Donations

If you do not itemize your taxes and you make a small charitable donation, it will likely not be tax deductible. For 2024, the standard deduction available to single filers is $14,600 ($29,200 for joint filers). If that standard deduction is higher than the sum of what all your itemized deductions may be, even with a small charitable donation, you would logically end up taking the standard deduction to minimize the taxes you pay. If you have high deductions, including business expenses, student loan interest, large medical bills, mortgage interest, and others, you may gain tax benefits from a small donation to charity.

Large Cash Donations

Charities often prefer cash and can use it right away, so large cash donations tend to be much more tax-deductible than donations of other types of assets. The deductibility of a large cash donation depends on the type of the charity and the level of your own income. It’s important to work with your tax professional about your charitable giving strategy as it could make sense to break up donations over several years to maximize tax savings.

Donating Securities

Some young professionals do not have large cash reserves to donate but they do hold securities, such as stocks. By donating securities instead of selling them outright, you can avoid the capital gains taxes and gain an immediate income deduction. However, the deduction tends to be lower than for cash donations, meaning individuals still may need to run the numbers on selling the security to make a cash donation versus donating the security outright. You would also need to keep records documenting the security’s cost basis and value upon donation. Again, it is critical to consult a tax professional regarding your personal situation.

Donor-Advised Funds

I recently spoke with a couple whose tax advisor was urging them toward a Donor-Advised Fund for some highly appreciated stock that they wanted to sell but minimize their taxation on. Like a direct donation, the Donor-Advised Fund provides income tax benefits and prevents the couple from paying capital gains from the sale. Unlike a direct donation, this vehicle also allows for invested charitable assets to grow tax-free and be distributed to charities over time, providing benefits for many years to come.

The problem for this couple was that much like the first few types of charitable strategies we discussed, putting securities in a Donor-Advised Fund is irrevocable. This couple needed the proceeds of the stock sale for their other financial goals, making the recommendation a great tax strategy but a horrible financial planning strategy. It’s important to balance your financial goals with your taxation strategies.

Charitable Trusts and Pooled Income Funds

Charitable Lead Trusts, Charitable Remainder Trusts, and Pooled Income Funds are all unique charitable strategies where investors still have an interest in the funds donated while gaining tax deductions. Oftentimes, investors will look to a highly appreciated asset for a strategy like this, such as stock or a home.

Charitable Remainder Trust and Charitable Lead Trust

Let’s say an investor is 35 years old, currently the top federal income tax bracket, and she made a lucky guess at a stock investment when she was in her 20s. Her original investment was $10,000 and the stock is now worth $1,000,000. If she sold that stock today, she would lose a significant portion of her investment to taxes.

However, if she opted to utilize a Charitable Remainder Trust, she could take an immediate income deduction for the amount expected to go to charity, sell the stock without incurring capital gains, invest in a diversified portfolio, collect income for the duration of her life, and have the remaining assets upon her death go to the charity of her choice.

A Charitable Lead Trust works similarly, with income to a charity being distributed first and a lump sum to a non-charitable beneficiary being distributed last.

These types of vehicles can be complicated and expensive so it’s important to work with your financial professional, tax professional, and estate planning attorney to see if a strategy like this is right for you.

Pooled Income Fund

Pooled Income Funds are distinctly different from charitable trusts because the donor does not control the investments in this fund. Instead, the charitable organization or nonprofit itself manages the funds and pays each of the donors dividends based on the fund’s performance. The investor receives the tax deduction for the donation and when the donor passes away, the funds are retained by the organization.

Choosing Your Strategy

At the end of the day, the best charitable strategy for you is unique to your values, current and future deduction needs, tax status, income needs, and other financial goals. The strategies of cash and securities donations are straightforward and do not require ongoing cost and maintenance. The Donor-Advised Fund requires ongoing maintenance and cost for higher levels of charitable deductions over time. The most complicated and costly trust strategies allow for investors to continue to directly benefit from the money that they have earmarked for charity. It’s important to work closely with financial, tax, and legal professionals regarding your unique situation to find the best path for you.

This article was originally published by me on Forbes.

This informational and educational article does not offer or constitute, and should not be relied upon as, tax or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax, and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve or make any representations as to the accuracy, completeness or appropriateness of any part of any content linked to from this article.

Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-6307169.1 (2/24)(Exp. 2/26)