facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
5 Strategies for Tax-Efficient Charitable Giving, Episode #23 Thumbnail

5 Strategies for Tax-Efficient Charitable Giving, Episode #23

While we never recommend donating to charity solely for tax purposes, if you’re giving to charity anyway, why not maximize the tax benefit of your donations? In this episode, we share five different strategies for donating to charity in a tax-efficient manner. These include donating appreciated investments rather than cash, “bunching” your gifts, using a donor-advised fund, making qualified charitable distributions, and even starting your own non-profit. What you choose to do with the tax savings is up to you, even if that’s turning around and donating the money to your favorite organization! 

Outline of this episode

  • How charitable contributions work [1:41]
  • Strategy 1: Donating appreciated shares of investments rather than donating cash [3:25]
  • Strategy 2: Bunching your charitable contributions [6:13]
  • Strategy 3: Donor-advised fund [8:24]
  • Strategy 4: Qualified charitable distributions from your IRA account [10:08]
  • Strategy 5: Starting a non-profit [13:32]
  • Recap of all 5 strategies [15:52]

Donating appreciated investments will save you taxes and can mean a bigger impact

Many charities are set up to receive in-kind donations of investments, whether those are mutual funds, ETFs, or individual stocks or bonds. Rather than selling investments and then donating the cash, or simply donating cash you have available, you can donate the investments directly. Donating appreciated shares of investments rather than donating cash is most relevant if you have a taxable investment account, also known as a brokerage account, a joint account, or an individual account. This is an account you can use to save and invest for different goals outside of your retirement accounts (things like your 403b, 401k, IRAs, etc.). You don't receive the same tax benefits for saving and investing to a taxable account as you do for some of the other accounts, but you also have more options and flexibility when it comes to tax planning, including charitable giving. 

Why would you want to donate investments instead of cash? If you sell the investment and donate cash, you will pay taxes on the gains, but if you donate the investment and the charity sells it, they don’t pay taxes. You save on taxes and still receive credit for the same amount of charitable contribution. 

Combining multiple years of donations into a single year with bunched contributions

Now that the standard deduction has been raised, fewer people itemize their deductions when filing their taxes. If you aren't itemizing your deductions, you generally won't receive tax credit for your charitable contributions. If you’re married filing jointly you won't get a tax deduction for charitable giving until your total itemized deductions exceed $25,100 (as of 2021). For individuals, it’s $12,550. With that in mind, bunching your charitable contributions is one thing you can do to help get over that threshold for your contributions to start counting for tax purposes. Bunching just means combining multiple years of donations into a single year. You would then space out your contributions, say every two or three years. So instead of donating $10,000 every year, you could donate $20,000 every other year or $30,000 every third year.

This gives you a much larger amount to report as part of your itemized deductions and increase the likelihood that you'll exceed the standard deduction threshold when filing your taxes. During the years you make your bunched contribution you itemize your taxes, and during the off years, you take the standard deduction. The end result is that the charity ends up receiving the same amount of money from you over multiple years, but you're able to save on taxes along the way.

The best combination of strategies #1 & #2 for those who like to give yearly

Some people prefer to make consistent annual donations rather than larger ones less frequently. If that’s the case, you may want to use something called a donor-advised fund (DAF). A DAF is an investment account that you can use to distribute money to charity. You contribute money or investments to the DAF and receive a tax deduction for the full amount when you contribute it. Once the money's in the account you can manage it, including investing it. You then have the flexibility to decide how much and to which charities you would like to distribute to each year. 

It's the best of both worlds for people who like to make consistent donations since you're able to use the bunching strategy when contributing money to a donor-advised fund, but then you can then make steady annual donations since you're free to decide how much to send from the donor-advised fund to charity each year. Additionally, when it comes to making contributions to a donor-advised fund, you can transfer either cash or investments. So if you have a taxable investment account with appreciated investments, it's best to use that first strategy we discussed of donating those appreciated investments since that will be the most tax-efficient.

Resources & People Mentioned

Connect With Trent and Andrew

Subscribe to The Physician’s Guide To Financial Wellness
on Apple Podcast, Spotify, and Google Podcast