When meeting with our philanthropically minded clients, we often say, “give cash last.” Donating cash is simple, but it’s not always the most tax efficient. As we are nearing the end of the year, many clients plan to make charitable contributions, and it is our job to help make those contributions go as far as possible. What does this mean for you? If you have an IRA, investments like stocks or real estate that have appreciated over time, you might be better off donating those instead of cash. Why? Because by donating non-cash assets, you can often avoid capital gains taxes and/or income taxes. In other words, you’ll give more to charity without having to hand over extra cash to the government. Here are the top 6 ways to get the biggest tax break for your donation:
1. Use Your IRA for Charitable Giving
Do you need to satisfy your Required Minimum Distributions (RMDs) from your IRA? You can avoid the tax hit from those RMDs by donating directly from your IRA to charity through a Qualified Charitable Distribution (QCD). Even if you are just 70 ½ and don’t have to take an RMD yet, you still maybe be eligible to give through a QCD.
How It Works:
• Contact your IRA provider and request a direct transfer to a qualified charity (or request a checkbook and write checks to charities yourself!
• The amount you give won’t be counted as taxable income, and it will satisfy your RMD.
Why It’s Smart: It’s a great way to reduce your taxable income while meeting your RMD requirement. It’s especially useful if you don’t need the income from your IRA for living expenses but still want to make a charitable impact.
2. Donate Appreciated Stocks, Bonds, or Mutual Funds
If you’ve got stocks, bonds, etfs or mutual funds in a taxable brokerage account that have increased in value since you bought them, this is one of the best ways to donate. Why? When you donate these assets directly to a charity, you avoid paying capital gains taxes on the appreciation, and you get a tax deduction for the full market value of the securities.
How It Works:
• Look through your portfolio for any investments that have appreciated.
• Transfer the stocks, bonds, or funds directly to the charity (don’t sell them first).
• The charity then sells the investments tax-free and gets the proceeds to use for their cause.
Why It’s Smart: You avoid paying capital gains tax, so the value of your donation is higher. It’s a win-win—you give more, you get a tax break and the charity gets more.
3. Use a Donor-Advised Fund (DAF)
If you’re looking for flexibility, a donor-advised fund might be the perfect solution.
A DAF allows you to contribute cash or assets like stocks to an account, receive an immediate tax deduction, and then distribute the funds to charities over time. Think of it as your personal charitable giving account that you control.
Donor Advised Funds are the fastest growing way to donate in the United States. Because the standard deduction has been much higher in recent years, to get the biggest tax benefit, some investors are ‘bunching’ several years of giving into one tax year, getting the bigger tax benefit in that year, and then making distributions over the next several years. Think of giving more in a 2 year cycle that keeps repeating vs just giving directly from cash each year.
For example, a donor might contribute $50k in one calendar year, receive the tax break for that year, and then make $25k worth of distributions in that year & another $25k worth of distributions in the next year, then load up the donor advised fund once again for another 2 year cycle. This allows the donor to take the higher deduction in the year they are “bunching” their donations and the standard deduction in the “off years.”
How It Works:
• Set up a DAF through a sponsoring organization (most major financial institutions offer them).
• Donate assets like stocks or cash to the DAF.
• You get a tax deduction right away and then you can distribute grants to your favorite charities whenever you like.
Why It’s Smart: DAFs give you the freedom to plan your giving. You can invest the assets within the fund and let them grow, potentially increasing the amount you can eventually donate.
4. Give Tangible Personal Property (Art, Collectibles, etc.)
If you own valuable personal items like artwork, real estate, cars, or collectibles, these can also be donated to charity. Depending on the item and how it’s used by the charity, you may be able to deduct either the fair market value or the cost basis of the item.
How It Works:
• Donate items that are of significant value.
• If the charity can use the item (e.g., donating art to a museum), you may be able to deduct the fair market value.
• If the charity sells the item, the deduction might be based on the cost basis (what you originally paid for it).
Why It’s Smart: Donating tangible items can help you offload valuable but non-liquid assets while benefiting from a tax deduction. It’s a great option if you have personal property you no longer need or want.
5. Use Life Insurance
Using life insurance to donate is a great option if you want to make a significant future donation without needing to use other assets. You can either donate a policy you no longer need or make the charity the beneficiary of a current policy.
How It Works:
• Option 1: Transfer ownership of an existing policy to the charity. You may be able to deduct the policy’s cash value at the time of donation and premiums paid.
• Option 2: Name the charity as a beneficiary on a new or existing life insurance policy, ensuring a future gift.
Why It’s Smart: Donating life insurance allows you to make a larger impact over time, using minimal resources now. If you transfer ownership, you may also receive an immediate tax benefit for the policy’s value and any ongoing premiums paid.
6. Charitable Trusts
For those looking to make a significant impact while also planning for their estate, setting up a charitable trust can be a great way to give. There are different types of charitable trusts, such as Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs), which allow you to donate assets while retaining an income stream or passing assets to heirs.
How It Works:
• Set up a trust that holds appreciated assets like stocks or real estate.
• A Charitable Remainder Trust (CRT) provides you or your beneficiaries with income for a set period, and the remainder goes to the charity.
• A Charitable Lead Trust (CLT) directs income to the charity for a set time, after which the remainder goes to your heirs.
Why It’s Smart: Charitable trusts allow you to make a significant contribution while receiving tax benefits and potentially providing for your family. They are a great tool for those with complex financial or estate planning goals.
Final Thoughts
If you’re an investor, donating cash should be your last resort. By giving appreciated securities, real estate, personal property, a life insurance policy or leveraging tools like IRAs or charitable trusts, you can have more money be received by non-profits and realize significant tax advantages. The “give cash last” mentality allows you to do more with what you already have, making a bigger difference for the causes you care about while being smart with your financial resources. Before you write that next check to charity, consider how some of your investments can reach even further….and get you a bigger tax break. Want to explore your options? Let’s chat.