How Physicians Can Incorporate Charitable Giving Into Their Financial Planning

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While the premise of charitable giving is making planned donations to your charities of choice, its impact is significant for both the receiving charity and the donor (you!). As people who have dedicated their lives to helping others, it’s no surprise that philanthropy is essential for many physicians and healthcare professionals.

With such a high lifelong earning potential, you’re in a unique financial position to make substantial contributions to organizations that are meaningful to you and your family. Not to mention, charitable giving can enhance a physician’s professional reputation within their hospital network and strengthen their relationships with community members and businesses. 

This article explores ways physicians can integrate charitable giving into their financial plans using tax-efficient strategies.

First, Align Your Charitable Goals with Your Financial Objectives

While charitable giving is an important cause, it must be incorporated thoughtfully and strategically into your greater financial plan — not treated as a standalone goal. 

Consider the phrase, “Put on your oxygen mask before helping others.” It’s not wise to risk your financial health by putting the needs of others (in this case, charities) first. To help others in a meaningful and long-term way, you must ensure your financial life is in good working order. When determining how much to give and what strategies to use, consider your greater financial priorities, like investing, saving for retirement, and paying down debt.

Create a Budget

Once you have your short-term obligations and long-term goals covered, your remaining income is considered “discretionary.” Alongside your financial advisor, decide what portion of your discretionary income you’d like to turn into charitable contributions each month, quarter, or year.

Perhaps you’d like to automatically defer funds every paycheck to a separate account, similar to contributing to a 401(k) or 403(b) dedicated to funding your philanthropic efforts. Or, you’d like to give annual bonuses or additional income to charity as you receive it.

Finding the Right Charities

When determining which charities you’d like to support, it’s essential to do your research — especially if they’re not local or highly recognizable organizations like The Red Cross, UNICEF, Salvation Army, etc.

You need to be selective in who you support for two primary reasons. First, you want to know that your money will make a difference. Second, the IRS only provides tax benefits for charitable contributions to qualifying nonprofits and foundations. 

To start, think about what charitable causes resonate with your values and passions. For example, many physicians are naturally drawn to medical research organizations. Or, they may donate to organizations that support patients and their families in various ways. But there’s certainly no rule that says you must focus your philanthropic efforts on these causes.

Perhaps you’re passionate about climate change or social justice. Or, you’d like to provide more mentorship and educational opportunities to young people in underserved communities. Whatever cause is close to your heart, there’s undoubtedly a charity dedicated to addressing it. 

How to Avoid Scam Charities

The IRS has identified fake charities as one of their “Dirty Dozen” tax scams. Unfortunately, as scammers get more sophisticated online and over the phone, it can get harder and harder to pick out legitimate organizations from the scams.

Fake charities are especially prominent when natural disaster or geopolitical conflict erupts. These scammers pray on people’s desires to support those impacted by disasters in other countries, but tracking where the donations end up is often impossible.

The good news is there are a few resources you can use to check the legitimacy of an organization you’re thinking about supporting. The IRS recommends searching their Tax Exempt Organization database to confirm an organization’s tax-exemption status. Third-party charity watchdog groups like Charity Navigator also provide unbiased ratings and information on an organization’s transparency and legitimacy.

Leveraging Tax-Efficient Giving Strategies

Incorporating charitable giving into your financial plan involves more than writing a check every December to your charity of choice. Using the strategies below, you and your advisor can identify opportunities to maximize your impact while minimizing your tax liabilities.

Donor-Advised Funds

With a donor-advised fund (DAF), you open a separate fund that’s owned and overseen by a sponsoring organization (typically a 501(c)(3) nonprofit). Anything you contribute to this fund is legally controlled and owned by the sponsoring organization. The benefit is that your contributions to your DAF can be deducted from your return as charitable contributions (assuming you itemize your deductions).

If your DAF includes investments, anything earned within the fund is not subject to taxes. While the sponsoring organization owns the fund, you retain advisory privileges. This allows you to dictate how you’d like the funds distributed — which charities receive donations, how much they receive, and how often.

With a DAF, you can immediately get distributions to qualifying charities to receive the tax benefit. Instead, you can deduct contributions the year they’re made.

Appreciated Stocks

Usually, if you sell a stock that has appreciated since you purchased it, you must pay capital gains tax on the appreciated value. But, if you’re looking to incorporate philanthropic giving into your financial plan, it might make sense to donate the appreciated stock instead of selling it, paying the capital gains tax, and donating the remaining amount.

When stocks are given directly to qualifying charities, the investor (you) does not have to pay capital gains tax on it. In addition, you can deduct the total fair market value of the stock from your income taxes.

Some charities (especially small or local organizations) must be set up to receive appreciated assets as donations. You can, however, donate the appreciated stock to your DAF, take the tax deductions, and then direct distributions from the DAF to your charity of choice.

Charitable Trusts

Like a DAF, a charitable trust is a separate legal entity established for charitable giving. After establishing the trust, you can contribute cash or other assets to the trust.

If you establish a charitable lead trust, the trust will pay your qualifying charity on a fixed schedule for a specific period (typically up to 20 years). After that time, anything remaining in the trust will return to the initial donor (you) or your beneficiaries, typically children or grandchildren.

A charitable remainder trust works oppositely. Payments are made to your beneficiary for a specified period. Whatever remains after that period is over goes to charity. 

Consider Incorporating Charitable Giving into Your Estate Plan

If you’d like to leave a lasting legacy of philanthropy, you and your advisor can explore ways to support your favorite causes beyond your lifetime. Charitable trusts, for example, are an effective way to incorporate charitable giving into your estate plan.

If you anticipate your estate’s value exceeding federal or state exemption limits, incorporating charitable components into your estate plan may also provide some potential tax benefits for your heirs.

Interested in Charitable Giving?

Charitable giving is a powerful way for physicians to make an even more significant impact in their communities than they already do. If you’re considering pursuing philanthropy or want to establish a legacy of giving, it’s essential to be proactive and thoughtful in your preparations. When you can incorporate charitable giving into your financial plan strategically, you can pursue your philanthropic endeavors without sacrificing other aspects of your financial well-being.

If you’d like to talk to an experienced advisor about including charitable giving in your financial plan, reach out to our team today.

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