So you’ve decided to donate a lot of money. Perhaps you have a particular cause or organization you’re really passionate about; perhaps Peter Singer convinced you that you had an obligation to; perhaps you just noticed that helping people out is awesome. Heck, maybe you just won the lottery and want to give it all away so you don’t end up bankrupt.

Whatever the reason, the next step after “helping people out is awesome” is “helping more people out is more awesome”—and maximizing how much you help requires getting the financial details of your donations right. Here’s how.

Note: if you’re interested in donating and have other questions, please get in touch! I love talking about this stuff and am happy to help you set things up, talk through choosing causes, etc.

Disclaimer: any references to tax or retirement savings law are specific to the US. Furthermore, this is not tax advice. I am not an accountant. I take no responsibility if paying attention to this post makes you sad or ruins Christmas or causes demons to fly out of your nose. You have been warned.

Decide where and when to give

This part is mostly outside the scope of this guide, but has a bit of relevance, in two ways.

The most relevant question is probably whether you think it’s more effective to donate now, or save and donate later. There are strong arguments on both sides of this debate; there’s a good summary by Julia Wise on the effective altruism blog. How you answer this question has a lot of implications for how you should allocate your money right now, which will be discussed below.

The other part, which is more of a detail, is whether you expect to be donating mostly to registered 501c3 non-profits, or also to other less formal causes (for example, funding start-ups or independent researchers). This is because there’s a special investment vehicle called a donor-advised fund (discussed below) which provides some tax advantages, but can only be distributed to registered nonprofits. This isn’t as important as the previous point, but may be relevant to you.

Think about how much you want to give

Unless you have strong views on this already, the standard “large chunk” to start with seems to be 10%. This is the amount in the Giving What We Can pledge, has been the standard church tithe for centuries, and is manageable for many career paths. But many people also give less or set different schedules—I know one couple in Boston who decided to give 1% for each year they’d been married.

It’s also possible to be more adventurous, even on a limited salary. For instance, Julia Wise has written about what it’s like to give half and what she might do if she were single and making the median personal income (she could still manage to donate 22%)! But that takes a lot of dedication and frugal habits that not everyone has, so it’s definitely best to start small.

Another small point in favor of donating less at the beginning is that if you save the money and later decide to donate it, you may benefit more from the tax deduction. That’s because, if your income increases, your marginal tax rate will also increase, so the value to you of a tax deduction will increase. This will probably be a fairly small effect, though: even if your income doubles later in life, your marginal tax rate won’t go up by more than 10%. So this is most applicable if you’re currently in college or planning to switch to a much more lucrative job.

Don’t spend lots of money

This is the least charity-specific step, hence the one most-covered elsewhere. The best advice I can find comes from people who want to save up for a different (and more widespread) goal: retiring very early. The best known is probably Mr. Money Mustache (“Financial Freedom Through Badassity”), a blog written by a guy who saved up enough money to retire at thirty-something. The author is a pretty entertaining writer, and although his goal isn’t to donate a lot, most of the stuff he does transfers quite well. In addition to the blog, he also has a long recommended reading list. If you Google you can probably turn up truckloads of similar sites, since retiring early is a very attractive fantasy for a lot of people.

Be aware of how taxes work

Income and deductions

The amount of tax you pay is based on your taxable income, which is calculated from your adjusted gross income (AGI) by applying a tax deduction for certain things that the government decided should be tax-exempt. One of these tax-exempt things is charitable contributions, so this is very relevant.

There are two ways of determining your tax deduction. Most US citizens take the standard deduction, which is an unconditional deduction of $6,000 that doesn’t require you to do any calculations. Since most people never go above that in deductible expenses, and it’s less effort, this is a good choice.

However, people making large charitable donations are especially likely to have deductible expenses exceeding the standard deduction. In addition to donations, other things that may cause you to exceed the standard deduction are state or local income taxes or sales taxes (you may deduct one or the other but not both) and property taxes. If the sum of what you spend in these categories exceeds $6,000, you should file an itemized return, which is a little bit more complicated, but not much. If you’re itemizing, you need to keep documentation of any expenditures that you’ll deduct in case the IRS audits you.

Deduction caps

In the US, charitable tax deductions are limited to 50% of your adjusted gross income for cash, or 30% for capital gains. This is something to be aware of, but let me stress that this will probably not be an issue for you: it’s absolutely not usual for even a dedicated earner-to-give to donate that much. And even if you save up a lot and donate it all at once, you can carry over the donation and keep deducting it for up to five years, so it still may not matter. But it is a weird corner case that comes up sometimes, and it’s something to be aware of if you end up having a ridiculously high income or something.

(N.B.: For the capital gains deduction limit, you may be able to use tax-loss harvesting to ameliorate it; see the section on “investments” below.)

Marginal tax rates

The US income tax is progressive: the more you earn, the greater the percentage you pay in taxes. That means that a deduction is more valuable to you when your wages are higher. If today you make $20,000, then your marginal tax rate is 15%, so a deduction of $1,000 reduces your taxes by $150; but if next year you make $500,000, then your marginal tax rate is 39.6%, and the same deduction of $1,000 reduces your taxes by $396.

So if you’re anticipating that in the future you might be in a higher tax bracket (and you won’t have hit the deduction cap at that time), this is a point in favor of saving some extra money to donate then. It’s probably not a very large point—the difference between even the lowest marginal tax rate and the highest is only about 30%, and this could easily be swamped by other differences between donating now and later. But it’s something to keep in mind.

Bunching donations

Because there’s essentially a floor of $6,000 on your tax deduction for a single year, it can be advantageous to shuffle your deductions around. For instance, if you plan on donating $10,000 every year, then you could alternate between donating it in late December and early January, so that you donate twice in one calendar year and not at all in the next. During the years you don’t donate, you’ll take the $6,000 standard deduction, and during the years you do, you can take a $20,000 itemized deduction, decreasing your net taxable income over a two-year span by $6,000.

In the right circumstances, this plan can save you hundreds to a thousand dollars a year. However, there are some caveats and corner cases. In a separate post, I did a more detailed analysis with actual math to figure out how much it will save you.

Donation matching

Some employers will match donations up to a certain limit, which can be as much as $50,000 for e.g. General Electric. For someone donating a lot, this is basically free money! When comparing salaries for potential employers, check their donation matching policy.

For large corporations, GreatNonprofits has a table of various matching programs—you can sort by “maximum amount matched” to find the best ones for an employee. (Of course, don’t let these rankings guide your decisions too strongly—there are plenty of other important things to think about, like field, base salary, growth potential, intangible benefits, diversification within the EA movement, etc.)

Donor-advised funds

If you plan on saving some money and giving it away later, you can put it in a donor-advised fund (DAF), which is a tax-deductible investment account that can only be paid out to registered nonprofits. This allows you to take a tax deduction during the year that you put money into the DAF, instead of the year that you actually distribute the money to a charity.

My impression of DAFs is that they may be helpful, but only if you plan on donating a large lump sum of saved income later in your life (around 200% of your AGI). At that point, if you invest the money yourself and then donate it normally, then even with the five-year carryover mentioned above, the magic of compound interest may leave you with a large enough lump that you wouldn’t be able to deduct all of it. (For instance, if you typically donate 10% of your AGI, and in one year you donate an additional 210%, then your total donation for the next five years is 260% of your AGI, and the donation cap over five years is 250%.) A DAF could also be useful if you expect to get close to the 50% cap later in life through normal annual donations and also want to save now, but I stress again that this would be pretty unusual.

On the other hand, DAFs have a couple notable downsides:

As mentioned before, ceteris paribus it’s better to count your donations later in life because your marginal tax rate will be higher (though this effect is usually small).

Additionally, DAFs are usually restricted to giving to registered nonprofits. If you later decide you want to put money into a start-up, or fund someone to do independent research, your hands will be tied.

My (limited) impression is that DAFs charge a higher management fee than pure savings vehicles.

Finally, the people who run the DAF are not legally obligated to respect your wishes. It’s unusual for them not to, but technically possible, and you may not have much recourse if it happens.

Because of these downsides, DAFs are mostly only useful if you expect to run into the tax deduction caps later (and hence want to spread out your giving over more years).

For further reading, Brian Tomasik has a good discussion of the pros and cons of DAFs. If you want to create one, Ben West wrote a how-to for 80,000 Hours.

Saving

You should also save some money for yourself, for unemployment, emergencies, future opportunities, investing in your own human capital, etc. You can save money either in a designated retirement account (which has tax benefits, but also penalties if you withdraw from it before you retire); investment vehicles like stocks or bonds (which are more flexible/liquid but more taxed); or a bank account (which is the most liquid, but offers very low interest).

401k plans

These are how you save money for when you retire. Your employer may offer 401k matching. If they do, this is practically free money. You should probably take it unless ALL of the following are true:

you plan never to retire;

you plan to donate the money;

you think that a donation of $X right now is more effective than a donation of $2X (or however much your employer offers in matching) when your 401k becomes accessible.

Contributions to 401k plans are capped at $17,500; your employer may match less than that. There are also various details about tax structure that Brian Tomasik has discussed.

Investments

Common advice in investing is that you shouldn’t try to beat the markets, or believe people who claim to beat the markets; instead, just invest in an exchange-traded fund (ETF), which tracks the performance of a certain basket of stocks like the S&P 500.

If you go this route, it may be advantageous to use Wealthfront, which uses a strategy called “tax-loss harvesting” to improve its tax characteristics. Basically, they will buy the stocks for you that an ETF would, but they then sell the ones that perform poorly in order to realize a capital loss that can be deducted from your taxable income (up to $3,000) or other taxable capital gains. If you end up donating your investments, you can donate the appreciated stock directly, and even if it goes over the cap of 30% of your income you can use deferred capital losses to offset the rest, leading to a completely tax-deductible donation.

Bank accounts

Bank accounts are more liquid and less volatile than investments: it’s easier to turn them into cash, and their value doesn’t go up and down as much. However, you pay for that liquidity and stability with a vastly lower interest rate, often basically zero. For this reason it may not be a good idea to have a lot of spare cash sitting around in a bank account—if you can, you probably want to invest it.

Talk to an accountant

Accountants are smart and know a lot about how taxes work! Way more than I do. If you have any unusual needs—or heck, probably any needs at all—consult one for assistance. It will probably be worth it.

Sources

Update 6/20/2014: Wrote another post with a detailed analysis of bunching donations due to suggestions by Eitan Fischer and Andy Chrismer. Edited the section about bunching donations to move the complexity to the other post.