By Emily Prater
When we think about charitable giving, oftentimes our default strategy might be to just write a check. But, from an income tax perspective, this may not be the most efficient way to donate. There are several important strategies that can be used to support the causes most important to you while also minimizing your income taxes presently or in the future.
1. Qualified Charitable Distributions
Many investors are aware of Required Minimum Distributions (RMDs), the amount that the government requires you to take out of certain qualified investment accounts once you reach a specific age – 73 for those born before 1960 and 75 for those born after.
You may be less familiar with another type of distribution, called Qualified Charitable Distributions (QCDs). A QCD is a direct gift from your traditional IRA to a charitable organization. You are allowed to make QCDs once you reach age 70 ½, which is before you hit that RMD age.
Making distributions from a traditional IRA before you’re required to reduces the account balance, which therefore reduces the future RMD amount. A smaller RMD can mean a lower income tax liability for those whose required distributions are greater than the amount they would normally need to withdraw from investments to support their lifestyle.
It is important to note that you cannot make a QCD from an employer plan like a 401(k). The account would need to be rolled into a traditional IRA. Also, for those who have received an inheritance, QCDs can be made from an inherited traditional IRA as long as you meet the age requirement.
2. Gifting Highly Appreciated Securities
Most investors would agree that they became investors with the intention of growing their money. Generally, the goal of investing is to give up a dollar today to get more than a dollar in return when you sell something in the future.
When considering making a sizeable charitable distribution, you may not want to take cash from your personal checking/savings, or you may not have the funds readily available. The next logical place to look for funds is your investment accounts.
As an advisor, I work with many clients who have highly appreciated stock positions that, if sold, would trigger the recognition of significant capital gains. They’re either not yet at the age to make a QCD or have minimal qualified assets.
If you’re in this situation, it might make sense to consider donating a security (stock, bond, ETF, mutual fund, etc.) with a large unrealized capital gain directly to the charity. By avoiding selling the holding to raise cash, you won’t have to recognize additional income on your tax return and you’ll still be able to support the organization.
Donating appreciated assets can also be an effective way to reduce concentration risk if certain positions in your investment portfolio have gains that have become too large to reasonably manage.
3. Donor-Advised Funds
Per the IRS, Donor-Advised Funds (DAFs) are separately identified accounts that are maintained and operated by a sponsoring organization (charity). The account holds the contributions of a donor. Once funds are contributed to a DAF, they are considered to be in the control of the organization for legal purposes, even though the donor still has discretion over how the funds are invested and distributed to the organization. DAFs are often used as a vehicle to donate highly appreciated assets.
One of the primary advantages of Donor-Advised Funds is the ability to “bunch” your donations for tax purposes. Given that the current standard deduction is so high ($15,000 for individuals and $30,000 for married couples), itemizing doesn’t make sense for many taxpayers. If you choose to bunch your donations – make several years’ worth of donations in one year – this could allow you to take advantage of itemization and pay less in tax.
EXAMPLE: Danielle and Robert are married and very charitably inclined. They plan to make $60,000 of charitable donations over the next 3 years. They have $10,000 of annual itemizable deductions outside of the charitable donations. They are in the 24% federal marginal tax bracket.
Scenario A: Danielle and Robert spread the donations evenly over the next 3 years.
2025 itemized deductions = $30,000 (20,000 + 10,000)
2025 standard deduction = $30,000
*Result – No difference between standard deduction and itemizing.
Scenario B: Danielle and Robert donate the entire $60,000 to a Donor-Advised Fund in 2025 and distribute the donations to the organization over the next 3 years.
2025 itemized deductions = $70,000 (60,000 + 10,000)
2025 standard deduction = $30,000
*Result – Federal income tax savings of $9,600 [(70,000 – 30,000) * 0.24)
Next time you reach for your checkbook or go to make an online donation, pause and consider if a QCD, asset donation, or a Donor-Advised Fund might be a better option. If you can help a cause you care about AND save on taxes, that’s a win-win.
If you have questions about any of these donation strategies, please reach out to a Blue Chip advisor.
Disclaimer: This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for individualized financial, tax, legal or accounting advice. You should consult your own professional financial, tax, legal, accounting, or equivalent advisers prior to making any investment decision. All investments involve a degree of risk, including the risk of loss. Past performance is not indicative of future results.
