Charitable Donations – The Basics

Charitable donations are an excellent way to leave a legacy and positively impact a cause that is important to you. Many people desire to give back to charities that support their values or influence them in some way, however, do not know that they are not maximizing the tax impact of these contributions.  

In this article, we will describe some of the most common charitable donation strategies and who should consider each strategy or even possibly use two in combination to get a double tax saving.

Basic Charitable Donation Strategies

Cash Donations

The simplest and most used charitable donation strategy is to give cash.  Many people do not realize they are giving to charity without getting a tax benefit.  This is because they do not have enough tax deductions to itemize on their tax return. There is nothing wrong with this, but there could be a way to get credit for these donations if you use another approach. 

Stock Donations

Did you know that most charities accept stock donations? Donating highly appreciated stocks can be a very effective strategy for making a significant financial impact on a charity of your choice and reducing your tax bill.

When you donate stock, you may be able to take a deduction for the entire fair market value and avoid paying capital gains tax, a double benefit. In addition, this can help you diversify or rebalance your portfolio without having to pay taxes.

Donor-Advised Funds

Donor-advised funds are just like another investment account, however once you contribute, the funds must be used towards donations to qualified charities. They great for those who want to bunch their tax deductions into a year when they have higher income or those who normally file for the standard deduction.  By contributing 3-5 years of your expected charitable donations in one year, you may be able to itemize which would reduce your taxes more significantly than if spread them out over the 3-5 year period.

If you do not itemize your deductions and are under age 72, this approach may be right for you. Typically, people who rent or have low mortgage balances and/or have low state and local taxes do not itemize their deductions even if they make significant charitable contributions each year.

Qualified Charitable Donations

Investors over age 70½ can make Qualified Charitable Donations (QCDs) from their IRAs that would otherwise be taxable. QCDs directed at the charity are not subject to tax up to a $100,000 annual maximum.

QCDs have a vital tax benefit. Investors who use a QCD instead of taking their annually Required Minimum Distribution (RMD) can lower their total investment tax bill by reducing their Adjusted Gross Income. If you do not itemize your deductions, making a QCD will likely reduce your taxes. This can also lead to lower Medicare premium surcharges as well. 

It’s important to note you cannot contribute to a donor-advised fund with funds from QCDs.

Combo Approach

If you have appreciated stock in a taxable account, you can contribute it directly to a donor-advised fund. This will allow for you to increase your overall deductions in a particular year AND avoid paying capital gains tax. This approach is optimal for those who:

  • Do not itemize their tax deductions
  • Own stocks in a taxable account (individual, joint, living trust, etc)
  • Who are under age 72

Taking it One Step Further

Often times you can take advantage of the combo approach by pairing this with Roth Conversions.  A Roth Conversion is where you convert a portion of an IRA into a Roth IRA, paying taxes today to avoid pay taxes in the future when take the money out of the Roth IRA.  This approach is complex and should be carefully considered.

If you plan on making a Roth conversion, you should try and pay the taxes with funds outside of your IRA. Funding a DAF (especially with highly appreciated stock) and taking the immediate tax benefit can significantly reduce the tax liability triggered by the Roth conversion.

How to Choose A Charitable Giving Strategy

Tax situations are unique for everyone, so it’s essential to look at your financial goals and evaluate which charitable giving strategies work best for you. Although there are many considerations when planning your charitable contributions, having a plan and setting goals will help you make the largest charitable impact and potentially help lower your taxable income.

  • Look at deductions
  • See if you have significant capital gains in your taxable investment accounts
  • Determine your charitable giving goals
  • Talk with your financial advisor/planner/accountant

The world is better when more people give to other less fortunate than themselves.  By optimizing your giving strategies, you will be able to do more for yourself, your loved ones and the causes that are important to you and your family.  Please let us know if we can be a resource to help you down the right path. 


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General Disclosure

This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. This presentation may not be construed as investment advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and are subject to change without notice.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2, available upon request or at the SEC’s Investment Advisor Public Disclosure site. As with any investment strategy, there is potential for profit as well as the possibility of loss.  We do not guarantee any minimum level of investment performance or the success of any portfolio or investment strategy. All investments involve risk (the amount of which may vary significantly) and investment recommendations will not always be profitable. Past performance is not a guarantee of future results.