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Up until now, I've been making my donations to charity in a very naive way, by just skimming the top 'x'% off of my raw income and using that bucket for donations.

Recently, I have been making more money, which has prompted me to ask the question, is there a smarter way to do this? Is there some way I could take that same percentage and invest it for an ultimately better payout to the charities I donate to? Some delay is okay up-front if it's needed to get my strategy seeded to start working for me, but the key is that I would utilize some investment that still allows me to make regular payments.

I will provide here one strategy I am considering as a concrete example of the sort of thing I'm trying to accomplish. One thing I have considered but still don't know much about is getting bonds that mature at different times - a month out, 3 months out, 6 months out, 9 months out, and a year out (or some similar plan) so that when I make the donation, I get to donate the percentage I took out of my income plus the interest collected on the bond. Right now, with interest rates as they are, bonds aren't particularly appealing, anyway, but this may be a better strategy at some other time.

What are some other strategies available to me?

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    Btw, if you asked the charities then they'd almost certainly prefer to have the money now, not the money with a return in 6 months time. Of course if there's a tax advantage to you, then you don't have to give them exactly what you want and they'll understand that, but if you think only about the total sum donated and not at all about the time value of money donated sooner, the only logical conclusion would be to give nothing to charity until you die. – Steve Jessop Jul 10 '15 at 18:51
  • Well, I think there's a balance. Of course any institution needs a steady flow of contributions, but all my contribution does not need to be just money for non-profits that aren't struggling. In such case, why not split up my contributions - provide some money to support for them a steady income, and have an annual or biannual donation in the form of an investment? Many better possibilities than just dropping cash, I would think. Cash is almost the worst kind of donation/investment you could have when there's so many opportunities to make your money work for you. – Josiah Jul 10 '15 at 18:58
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    well, it's your money. But if you say that it's better to invest than to give to the charities now, and the cash is a bad donation, then in effect you're saying it'd be better for the charities to invest than to spend donations now, and that they should be asking for things other than cash. This might be true, but they probably have their own ideas on the subject! Again, this is neglecting any tax advantage to giving indirectly via investments, I don't want to detract from dg99's points. I just mean that you shouldn't think of the return on the investment as "giving more". – Steve Jessop Jul 11 '15 at 0:21
  • Well, Steve, based on the advice I've received, I could donate what I would normally donate in cash, make my normal investments, and then make an additional donation in the form of stocks at the end of the year. I don't see how this keeps money from charities I donate to... – Josiah Jul 11 '15 at 6:41
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In the United States investing towards donation is a great idea because you can donate appreciated securities directly rather than donating cash. Notice how much this can benefit you:

  • You invest $10000 for 1000 shares of XYZ company (which, for the sake of this example, does not pay dividents to shareholders).
  • Two years later the market price of your investment has risen to $11000.
  • You donate 50 shares ($550) to the ASPCA (American Society for the Prevention of Caramel Apples).
  • Because you did not sell any shares or receive any dividends, your tax bill from this investment is $0, but you can still deduct $550 from your federal income tax!

So you get to both (a) donate untaxed money and then (b) deduct that unrealized money from your income total on your tax return.

With the above in mind, a good strategy for investing towards this type of donation would be to pick securities that are likely to increase in market value but not likely to produce any other sort of income. So bonds (which produce lots of interest income), or stocks with dividends, or equity mutual funds (which distribute dividends as capital gains) would all be suboptimal for this purpose.

Of course, an even better strategy would be to establish a widely diversified investment portfolio without thought to future donations. Then, once a year (or whenever), evaluate all your investments and find some where the market value has increased. Then donate some of those shares. No special advance planning necessary.


Note that your tax consequences could be more complicated depending on your exact situation. Read the section about Capital Gain Property in IRS Pub. 26 for all the details. There may be special limits on the amount you can deduct. Also, donations of short term capital gains are treated much less favorably, so make sure you donate only long term capital gain property.

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    I'll dare you attack the Caramel Apple minority in such a blatant manner! – Anthony Russell Jul 10 '15 at 16:21
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    @AnthonyRussell - Carmel Apples - so much more trouble than they are worth... – MrChrister Jul 10 '15 at 16:42
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    You're an Anti-Malus Caramelous! – Anthony Russell Jul 10 '15 at 16:49
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    Why exactly are bonds and such bad? Im guessing its tax related? – David says Reinstate Monica Jul 10 '15 at 19:35
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    @DavidGrinberg I edited my answer to explain a bit more. I'm certainly not saying that bonds aren't a good investment vehicle. But for this scenario -- where we want an investment whose entire increase in value is in terms of its market price -- we'd want to avoid vehicles that typically produce value in other ways (such as interest and dividends). – dg99 Jul 10 '15 at 19:56
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Depending on what your other deductions are and the amount you are wanting to donate, you can save some money by "batching" deductions into every other year.

For example, if you are single in 2015, the standard deduction is $6,300. This means the first $6,300 in deductions you have basically don't "matter" because the standard deduction is larger. You only "count" itemized deductions greater than $6,300.

Let's imagine you are donating $10k in 2015 and 2016 and have no other itemized deductions. If you donate in both years, you basically get a net deduction of ($10,000 - $6,300) * 2 = $7,400 over the standard deduction.

However, if you donate $10k in 2015 and the next $10k on Dec31, 2015, then you now have donated $20k in 2015 and $0k in 2016. This affects your taxes because you now get ($20,000 - $6,300) = $13,700 in "bonus" deductions. You still get the full $6,300 standard deduction in 2016 as well.

This can be a significant impact on your taxes (especially if you are married as the married deduction is double the single or have minimal other itemizable deductions)..

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    Fantastic point. That is also simple and easy to implement to boot. – Josiah Jul 10 '15 at 19:35
  • +1 Unfortunately, a lot of us have state income tax burdens that immediately put us above the $6300 every year. :( – dg99 Jul 10 '15 at 19:59

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