This past weekend, my family and I spent some time in Colonial Williamsburg. It’s really one of our favorite places to visit as the historical society has done a very good job of keeping the history of the town alive. If you’ve never been, there are hundreds of reenactors and artisans telling the stories of the time and creating common crafts the colonials used. It got me to thinking, who runs this thing and how much does all this make? It turns out that it’s the Colonial Williamsburg Foundation. A non-profit foundation that brought in $125.8 million dollars in 2023![1] Of the income, 9.7% came from investments, 26% from program services, and 50.9% from private donors. Over $64 million dollars were giving in 2023, which leads us to this week’s topic:
"Three Tax-Efficient Ways to Give to Charity”
Giving to causes that you care about is a personal and often private decision. This being the case, I sometimes find out about a client’s giving, but only after the fact. When this happens, I’ll ask how they gave the money, and the most common answer is, “I wrote a check.” Unfortunately, that is rarely the most tax-efficient way to give to your favorite charities.
So, while I don’t typically discuss technical planning topics in these notes, given the private nature of giving, I thought it would be helpful to share a few of the most common (but still underutilized) giving strategies[2] in hopes that it will encourage more conversation around this important topic. Here we go.
Give Appreciated Investments Instead of Cash
If you own investments in a taxable account that have been held for more than a year with significant unrealized gains, you can donate them directly to charity and deduct their fair market value[3]. The charity can then sell the assets without paying the capital gains tax. This strategy allows you to avoid capital gains taxes (plus the Medicare surtax, if applicable) and still receive a full deduction for the donation, while the charity enjoys the full benefit of your gift. A true win/win.
If your favorite nonprofit doesn’t accept securities directly, you could use a donor-advised fund (DAF) as a middle step. In this case, you could transfer the appreciated shares into the DAF, get the tax deduction in that year, and then provide “grants” to your chosen charities immediately or over time. Any funds not immediately distributed can grow tax-free[3].
“Bunch” Your Giving for a Bigger (Tax) Impact
With the expanded standard deduction, many people no longer itemize deductions each year, meaning some charitable gifts don’t create any tax benefit at all[4]. If you can, you might consider “bunching” multiple years’ worth of giving into a single year[5].
In a bunching year, you give more than usual—again, using a DAF or similar setup—so that your itemized deductions exceed the standard deduction with the intent to spread the actual grants to charities over several years[4].
Bunching can also be especially valuable in high-income years, such as after a business sale, a large bonus, or other high-income events, when a tax deduction is worth more.
In either case, you could think of a DAF as a charitable “holding tank” for future giving.
Give Directly from Your IRA
If you’re over 70½, you can give directly from your IRA to a qualified charity using what’s called a Qualified Charitable Distribution (QCD)[6]. This is one of the few ways to distribute money from an IRA without it counting as taxable income.
For investors 73 or older who are taking Required Minimum Distributions, QCDs can satisfy some (or potentially, all) of that requirement. By keeping this income off your tax return, it could help reduce your Social Security taxability or decrease your Medicare premiums.
In other words, using your charitable endeavors to manage your taxable income can be valuable in ways that aren’t immediately obvious.
A Few Big-Picture Thoughts
As surprising as it may seem, none of these strategies requires complicated planning. The biggest step is usually just having the conversation before you write the check so we can help match the right strategy to your charitable goals. Once the process is in place, it’s typically easy to repeat each successive year.
Here are just a few ways these strategies can be used:
- Support a cause you care about at a higher dollar amount than you thought possible.
- Reduce or eliminate a concentrated stock position without triggering a big tax bill.
- Reduce your IRA balance in retirement in a way that benefits charity instead of the IRS, while potentially saving on taxes and Medicare premiums at the same time.
As I said earlier, I’m sharing these ideas to encourage conversation around giving strategically. I know that generosity isn’t necessarily about saving money on taxes, but my goal is to help you make the biggest impact possible, both for the causes you care about and your bottom line. So, if one or more of these ideas sound appealing, let’s talk.
As always, stay the course.
[1] https://projects.propublica.org/nonprofits/organizations/540505888
[2] This is not an exhaustive list, as there are many ways to provide for philanthropic goals. [3] CohnReznick – Deductible up to 30% of AGI. For assets held less than one year, only the cost basis is deductible. [4] Rarely do people give just for tax purposes, but saving on taxes is a nice additional benefit of generosity. [5] Fidelity Charitable – You could give the entire gift in the year of the donation, but it could be spread over multiple years, which is the most common strategy in my experience when bunching donations. [6] Internal Revenue Service