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  • Writer's pictureStephen Boatman

Unlocking the Power of Tax-Smart Charitable Giving: 5 Strategies to Maximize Your Impact

When I talk with my clients about their favorite ways to spend money, the two answers I hear most are spending on experiences and giving it away. When it comes to giving money away, there is typically a strategy that can help you increase your impact without requiring you to give any more than you intended. The following strategies can stretch your dollars beyond simply transferring cash from your bank to the charity's bank. Follow along to see if any options apply to you.


5 Strategies


  1. Donor Advised Fund (DAF)

  2. Clumping Giving

  3. Gifting Stock

  4. QCD (Qualified Charitable Distribution)

  5. Emotional Return-Focused Giving


Donor Advised Fund (DAF)


A DAF can be seen as an efficient family foundation. You open the account with a custodian who holds donor-advised funds and then donate cash or appreciated stock into the DAF. Some DAFs can even accept appreciated land, cars, or other assets. Knowing where to open a DAF can be tricky but I’ve used donor-advised funds within Shchwab, American Endowment Foundation, and DAFFY, and DAFFY is by far the easiest to use and to grant from. The fees within DAFFY tend to be lower and their intuitive platform is pleasant to use.


DAF Benefits


  1. Accelerate charitable deductions: This helps you realize the full tax deduction in the year you transfer into the DAF. NOT the year you make the grant from the DAF to the charity.

  2. Ability to invest assets within the DAF

  3. Removes assets from your estate

  4. Donating appreciated assets helps you avoid capital gains taxes by transferring assets into the DAF and selling them once transferred

  5. Investments within DAFs can appreciate tax-free.

  6. Anonymity: You can donate anonymously from a DAF to maintain privacy


Example: 


Donor Advised Fund
Donor Advised Fund

Chance donates $30,000 of Amazon stock into his Donor Advised Fund. He purchased the stock for $10,000 and has a $20,000 capital gain that would normally cost him $20,000 * 15% fed cap gains tax + 4.75% NC state cap gains tax = $3,950. However, if sold within the DAF, he now pays $0 in taxes, meaning he now has $3,950 more to increase his impact on his chosen non-profit. With the $30,000 in his DAF, he invests $25,000 in T-Bills and immediately gives away $5,000. He will continue to donate $5k/quarter to his chosen charities. But he receives the full $30,000 deduction in the year he transfers the assets into the DAF. Not when he transfers the assets from the DAF to the charity.


Clumping Giving


This is when you combine multiple years of giving into one year in order to maximize your total deductions over a 3+ year time span. It works best when itemized deductions add up to be within 30% of the standard deduction. In 2024, the standard deduction is $14,600 for single individuals and $29,200 if you file married filing jointly. So, if your itemized deductions are in the range of $10,220 - $18,980 if you are single or $20,440 - $37,960 if you file married filing jointly, then this strategy may be for you.


Over three years, you could save $5,000+ by pursuing a clumping-giving strategy, as seen in the example below. You may not know where you want to write that big of a check right now, and that’s completely fine. We can use a Donor-Advised Fund (as seen above) to receive the deduction all in the current year and donate to charities over time.


Clumping Giving Example:


We’ll use Chance (single) from our last example. He currently has an itemized deduction amount of $14,000 per year. This means he takes the standard deduction of $14,600 annually as his itemized deductions aren’t higher than the standard deduction. He typically donates $10,000 annually but doesn’t receive any tax benefit from these gifts because he is still under the standard deduction threshold. However, he could clump his giving into this one year for the next 3 years. This would change his overall tax deductions over the next three years from ($14,600 * 3 = $43,800) to ($34,000 + ($14,600 2) = $63,200). Assuming he is in the 24% tax bracket and living in NC at 4.75% state income tax, the total tax savings would be = $5,577.50 using the clumping giving strategy vs. staying at the $14,600 standard deduction level for three years. Not to mention this would also help him avoid the $20,000 capital gain and the taxes on top of that ($20,000 * 26.75% = $5,350). Providing him with a total possible savings of $10,927.50!


Gifting Appreciated Stock


As you’ve noticed from reading this far, you can avoid capital gains tax if you give the stock to a non-profit/501(c)(3). However, you must give away the stock in kind. You can’t sell the stock within your investment account and give the cash away. You must donate the shares directly to the non-profit or Donor Advised Fund. This requires knowing their DTC number, the bank where they hold their investment account, and the account's name. The savings here can be drastic, especially when combined with a DAF and clumping giving.


Gifting Stock Example:


Jonathan, who lives in NC, purchased $5,000 worth of Nvidia stock in 2022 which is now worth $50,000, resulting in a $45,000 gain. Since he is in the 32% federal income tax bracket, he will owe a 15% federal long-term capital gains tax and a 4.75% state tax on these gains, which comes out to a tax expense of $8,887.50. However, he has decided to donate this stock directly to his favorite charity, Project 658. In doing so, he avoids the $8,887.50 tax bill entirely; Project 658 also avoids the tax bill with its non-profit status. And the $50,000 he was going to give can be used to re-purchase the Nvidia stock to stay invested and step-up his cost basis. The only person who doesn’t receive their $8,887.50 in this scenario is the IRS.


QCD (Qualified Charitable Distribution)


A QCD is when you write a check directly from your IRA to the charity/non-profit. It allows you to satisfy your RMD (required minimum distribution), give charitably, and keep your income low, which could help avoid medicare premium increases or other tax bracket thresholds. A QCD is only available for those over age 70.5 with an IRA. For this donation to count toward your RMD (required minimum distribution), you must have the charity deposit the check you write to them from your IRA before 12/31. This is often the largest stressor surrounding QCDs. People wait until 12/15 to write their charitable contributions to satisfy their RMDs in a tax-efficient manner, and the charity doesn’t cash the check until the following year. This is why I recommend ensuring all charitable donations from the IRA are completed before 12/1. 


The best way I’ve seen QCDs done is by getting a checkbook tied to your IRA and then only using that checkbook for charitable gifts. Track all your gifts from the checkbook, and at year-end, be sure that the amount of your IRA withdrawals that were QCDs are listed on your tax return. Not specifying how much of your IRA was a taxable withdrawal vs. a QCD is a common error I see and can cost thousands of dollars, depending on the scenario.


One large benefit of QCDs is that if you don’t have enough itemized deductions to deduct your charitable gifts, then you can avoid income taxes on the portion of your RMD that is a QCD and receive the standard deduction on top of that. Causing a healthy tax benefit for you in the year you pursue a QCD.


QCD Example:


Brent is 75, 22% tax bracket and lives in NC, he has an RMD of $20,000 for 2024, and regularly gives away $10,000 per year. Brent is married and files his taxes MFJ. His standard deduction is $29,200, which he takes as his itemized deductions aren't greater than $29,200. Now, instead of drawing the full $20,000 from his IRA to satisfy his RMD and then giving charitably from that draw. Brent decides to give via a QCD, which allows him to avoid taxation on the $10,000 and realize his standard deduction on top of that gift. Otherwise, if he withdraws the money from his IRA and donates it, if his itemized deductions are under $29,200 he won’t receive any tax benefit for that gift. This QCD strategy saved Brent $2,675 ($10,000 * (22% fed tax + 4.75% state tax)) by avoiding taxation on $10,000 that he otherwise wouldn’t be able to deduct because his itemized deductions were less than $29,200.


Emotional Return


As much as I love playing the tax game and increasing the impact I can have on the causes I care about. I often see that the giving that makes me and those around me feel the best comes from daily generosity. It’s seeing the single mom buying groceries and stepping in to pay for them, the kid struggling to purchase a car battery at Auto-Zone and purchasing it for him, or the friend that has had a tough month and you pick up their lunch. These areas hold no tax benefits, but the emotional and relational benefits are worth it. But, be careful not to be taken advantage of in this area and not to attempt to buy affection. But to altruistically give without expecting anything in return, is a benefit that can be felt long after the gift is given.


There’s an article about the biological benefits of giving altruistically HERE. I found it interesting and thought you might as well.


Charitable Deduction Annual Limits


What happens if your charitable gift for the year equals or exceeds your income that year? Is your deduction diminished? The answer is that there are certain deduction limits based on the type of asset you’re giving, and if those limits are met, the excess gifts roll forward five years. The deduction limits are found below.


  • Deduction for cash – up to 60 % of AGI.

  • Deduction for securities and other appreciated assets – up to 30 % of AGI.

  • There is a five-year carry-forward for unused deductions.


How Much Of Your Money Goes To The Cause?


I recommend looking into where your dollars go after they reach the charity you are considering. The first place to research what a charity does with its resources is discussing it directly with the charity, however, the internet has a few tools you can use as well. I like Charity Navigator, and Candid. Candid has much more data, but it has a subscription cost of $55/month. Charity Navigator is a great tool for researching specific charities but can also be helpful when you know the cause you want to support and they can recommend highly rated non-profits in that space.


One thing that may be frustrating for you within these searches is that although every non-profit has to file a Form 990 and post their financials publicly, churches do not. It’s extremely hard to find financial information surrounding churches. This is likely because they aren’t legally required to share this information, and the only way to get that info is directly from the church. However, non-profits that aren’t churches have their financial information on the IRS website. You will need to go directly to your church in order to see their financials.


Closing


I believe that giving money away is, mentally, one of the healthiest things you can do regarding your finances. It can help you see money for the tool that it is and not something worth as much sacrifice as society might insinuate. As always, I hope you found the information helpful and feel free to give me a call if you have any questions.


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