The United States is one of the most charitable countries in the world. We consistently rank among the top five in the World Giving Index. Our system of taxation encourages charitable giving. The federal estate tax of 40% on assets above $13.61. million is likely a contributing factor for the ~200 US billionaires who have signed the Giving Pledge to donate most of their wealth to charity.
Charitable deductions became one of the last levers to pull in tax planning after the passage of the Tax Cut and Jobs Act in 2017. The TJCA removed many miscellaneous deductions and set a cap on deductions for State and Local income taxes, such as property tax. The TJCA also doubled the size of the standard exemption, meaning that most Americans no longer itemize their deductions. However, charitable planning has become a big focus for those who can write larger checks.
The language and landscape of charitable planning can be cumbersome at first. This is an attempt to simplify them to the basic concepts.
Tax Deductibility
This summary should not be viewed as comprehensive. You should always consult your CPA or tax advisor regarding the deductibility of your charitable donations.
The TJCA of 2017 doubled the standard deduction on personal tax returns. The 2024 standard deduction is $14,600 single / $29,200 if married filing joint. Anyone with total deductions (mortgage interest, state and local income taxes SALT, charitable donations) below this amount may not need to keep track of their charitable receipts as they have in the past.
The following deductions apply to donations made to public charities with 501(c)3 status. Charitable contributions can be made in two ways: cash or property. A taxpayer may deduct up to 60% of AGI (adjusted gross income) via cash contributions to charity. Further, there are two types of property to consider. Goods you donate to Goodwill will receive a donation at the current fair market value (FMV), likely below your original cost for used items. Contributions of these types of goods are eligible to be deducted up to 50% of AGI, and they must be in ‘good working condition’ to qualify for a deduction. However, donating appreciated property, such as stock, is limited to a 30% AGI deduction. Taxpayers can carry forward unused donations for up to 5 years, so not all is lost.
There are so many rules that it’s impossible to keep this straight. Long story short: there’s a different limit for how much of your income can be written off for charitable donations, depending on whether you give cash, goods, or appreciated securities.
Donating Appreciated Securities
Donations of appreciated property, such as stocks, can solve two tax problems simultaneously. The fair market value of the shares is deducted, AND the donor avoids paying capital gains tax to sell the shares. Once owned by a charitable organization, the shares can be sold free of capital gains tax. Donations of capital gain property are limited to a deduction of 30% of AGI. If donating appreciated stock, make sure you’ve owned the stock for more than a year and that the stock qualified for long-term capital gain status.
There are two schools of thought on identifying which stocks to donate to charity. The first is to identify stocks with the highest percentage gain. For example, NVDA shares, up 500%, will rank above MSFT shares, up 300%. This strategy allows for the highest “bang for the buck” in giving away future capital gains tax liability. A second method is identifying overweight positions in a portfolio and using the donation to reduce concentration risk and position size. Instead of trimming the position, you donate some of it to charity.
Donor Advisor Funds
Charitable investment accounts called Donor Advised Funds can be helpful in tax planning for charitable deductions. Donor-advised funds, or DAFs, are set up as 501(c)3 charities, which means you deduct all funds in the year they are placed in the DAF. Subsequent grants to your favorite charities will not be deducted from your tax return. The idea here is to strategically “bunch” charitable donations into a high-income year or to push your charitable giving above the standard deduction and write off more against income.
Since charitable deductions are limited to 20%—60% of AGI, outsizing charitable donations during a high-income year can lower tax bills. A common strategy for DAF giving is to take 3-5 years of typical charitable giving, pre-fund the DAF, tax a larger deduction, and send DAF dollars to charitable organizations over several years. The sale of a business, an outsized bonus, exercising stock options, and receiving deferred compensation are all examples of when using a DAF to pre-fund charitable intent makes sense.
DAFs also make it easier to donate shares of appreciated stock. Not all charities are set up to receive stock donations, so using a DAF to donate the stock and send cash to the charity can make for a smoother process.
QCDs
Withdrawals from traditional IRAs are taxed as ordinary income. At a certain age, the IRS forces distributions from IRAs. These forced withdrawals are called Required Minimum Distributions (RMDs). Many investors are forced to take larger distributions than they need and pay the income tax bill on them. Meanwhile, the RMD starting age has increased from 70 and a half to 75, allowing for more growth of IRA assets and, potentially, higher forced withdrawals.
This is where a charitable intent can help lower tax bills. The IRS allows up to $105,000 annually (in 2024, indexed to inflation) to be sent directly from an IRA to a charity and avoid paying income tax on those dollars. These direct-to-charity donations are called Qualified Charitable Distributions (QCDs). QCDs qualify for RMDs, potentially avoiding the income tax bill altogether. QCDs must be sent directly from the IRA account to a qualified charity, usually by cutting an old-fashioned check. I recommend submitting QCD instructions as early in the year as possible. Financial custodians are swamped with QCD and other charitable donation requests in December, making it impossible to ensure execution before Dec 31.
Charitable Deductions and ROTH Conversions
Since charitable deductions are limited to a percentage of Adjusted Gross Income (AGI), maximizing their use may involve increasing income. Converting regular IRA assets to a ROTH IRA is one such strategy. The idea behind a ROTH conversion is to pay income tax today, presumably at a lower rate, to avoid higher income taxes in the future. ROTH assets grow tax-deferred, and withdrawals are tax-free. In a year when charitable contributions are high, ROTH conversions may fill the income gap needed to maximize those deductions. When calculated carefully, the ROTH conversion can incur very little, possibly zero, tax. This magical strategy works best in otherwise low-income years, such as early retirement before filing for Social Security.
The pairing of a ROTH conversion with charitable deductions is an entire blog post. Suffice it to say that the tax benefits of combining these two strategies can pay dividends for decades as ROTH assets grow tax-free.
Charitable Intent and Philosophy
Tax deductions and strategies are great, but how do donors ensure their donations make a meaningful difference in the world? The philosophy on how and where to give is shifting. Where once the percentage of dollars distributed by a nonprofit, as opposed to spending on administration and salaries, may not be the best financial metric to judge a charity’s impact. Philanthropist MacKenzie Scott outlines this concept brilliantly in one of her essays:
Because we believe that teams with experience on the front lines of challenges will know best how to put the money to good use, we encouraged them to spend it however they choose. Many reported that this trust significantly increased the impact of the gift. There is nothing new about amplifying gifts by yielding control. People have been doing it in living rooms and classrooms and workplaces for thousands of years. It empowers receivers by making them feel valued and by unlocking their best solutions. Generosity is generative. Sharing makes more. – MacKenzie Scott
Perhaps the most challenging part of giving to charity is determining which causes matter most. This is a personal decision made only through deliberate introspection and research. But do not let perfection be the enemy of progress. Sometimes, giving money away requires a simple action—to start.
