Charitable giving is a great way to strengthen your community and contribute to causes that you care about. It can be a very fulfilling act of kindness, but many people are unfamiliar with the different types of charitable giving and their unique tax advantages. Whether you’re donating cash, stocks, or planning for long-term giving, understanding each method’s tax benefits can help you improve your impact while reducing your income taxes.
Please note: The actual tax benefit of charitable giving is dependent on your personal situation and the classification of the charity. Therefore, it’s best to consult with a tax professional and/or the charity prior to giving.
1. Cash Donations
The type of charitable giving you might think of first is cash donations, which is also a straightforward method when it comes to taxes. If you itemize your deductions on your taxes, you can deduct a portion of your adjusted gross income (AGI) for cash donations to qualified charities. However, if you take the standard deduction, you generally cannot deduct charitable contributions. If this is the case for you, exploring other charitable giving methods could be more tax-efficient.
2. Donating Appreciated Stock
Donating appreciated stock, mutual funds, or ETFs can be more tax-efficient than giving cash. When you donate stock held for more than a year, you can avoid the capital gains tax that would be due if you were to sell the stock first. Depending on your income. capital gains tax can run you upwards of 20% at the federal level, plus additional state taxes based on where you live. Moreover, you can deduct a portion of your AGI if you itemize your taxes, making this a great way to give if you hold appreciated stocks.
3. Naming a Charity as a Beneficiary
For those unable to donate now and/or looking to leave a legacy, naming a charity as a beneficiary of your life insurance policy, brokerage accounts, or retirement plan can be tax efficient. Retirement accounts left to heirs are taxable, but when left to a charity, they can be transferred tax free. This can reduce estate tax liability, helping to ensure more of your wealth goes to your chosen cause rather than taxes.
4. Qualified Charitable Distributions (QCDs)
If you’re required to take minimum distributions from your retirement accounts (individuals who are 70 1/2 years or older), you can donate up to $108,000 per year (2025 limit per individual) directly from your IRA to a qualified charity through a Qualified Charitable Distribution (QCD). Unlike regular IRA withdrawals, this donation does not count as taxable income, making it a great way to satisfy your Required Minimum Distributions (RMDs) while not impacting your AGI.
5. Donor-advised funds (DAFs)
Another option is donating assets to donor-advised funds (DAFs), which allow you to receive an immediate tax deduction and allow for pledged donations over time. Your donated assets are usually managed by a professional investment firm, potentially increasing your charitable impact as your donations grow tax-free. However, DAFs have some considerations such as administrative costs, your donations being irrevocable, and limitations to the organizations you can support.
Planning Your Charitable Giving Strategy
By creating the right giving strategy for your situation, you can significantly reduce your tax burden while making a meaningful contribution. Whether you’re looking for immediate deductions, ways to lower capital gains, or long-term estate planning benefits, charitable giving can be a win-win. If you’re able, we encourage you to give back and make a meaningful impact in your community and around the world.
Please contact your Raegen, Parker and Associates advisor for personalized help on how to optimize your charitable giving strategy.
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