Why should you consider making charitable giving a part of your financial strategy?

Knowing that you can effect change in the world is a priceless feeling and so it is no surprise that financial contributions to charitable causes are a popular way to make a positive impact. What may be surprising is the effect that a committed and purposeful approach to charitable giving — leveraging budgeting, tax benefits and financial instruments — can have in maximizing the dollars that end up with the charities you support.

While you may have begun your giving journey by responding to annual appeals from charities or making ad hoc cash donations seasonally, the first shift you can make to increase your impact is moving from reactive to proactive giving.

Rather than choosing to give as funds become available or a charity reaches out to you, strategic giving begins with a budget: identifying how much you want to give — alongside your other financial goals — on an annual basis. Setting and funding this giving budget as part of your overall financial plan can help ensure you are able to tap into tax benefits and other tools that can ensure dollars that would otherwise be paid in taxes reach the charities you support instead. The key to understanding the tax benefits lies in the amount, timing and form of the donations you make.

When it comes to understanding the tax impacts of charitable giving, the first question for many people is whether it makes sense to itemize deductions or take the standard deduction. You cannot claim a deduction for your charitable contributions if you elect to take the standard deduction (PDF).

Another important consideration in strategic giving is a shift from donations of cash to donations of appreciated securities like stocks. The reason: Charitable donations of long-term investments — in addition to allowing a tax deduction of their market value — avoid the capital gains tax. That tax savings means the full value of your investments goes to the charity, resulting in more charitable impact than if you sold those securities, paid some of the proceeds to taxes, and made a cash donation.

A windfall for you may mean you have extra money to donate now. Waiting to make a donation can mean paying more in taxes at the end of the year, but you may not be ready to decide which organizations you want to support. Fortunately, there is a financial vehicle that can decouple the timing of tax deductions and donations.

A donor-advised fund offers a convenient, flexible, tax-advantaged way of giving that allows you to make a sizable charitable donation you can claim immediately as a tax deduction. The money isn't donated immediately, though. Instead, it is placed in an account and invested tax-free, letting you distribute its funds over your desired timeframe to the nonprofit organizations of your choosing.

There are limits to the amount of charitable deductions you can claim in one tax year when itemizing, and donations in excess of the limit can be carried over for up to five years. Consider consulting a tax advisor for more information.