Guest Author:
Seth Cave, CFP®, CEPA® at Ellerbrock-Norris
Did you know that the way you give to charity can be just as important as the amount you give? Many generous donors write a check each year to their favorite nonprofit, but in doing so, they may miss out on tax benefits that could allow them to give even more. With a little planning, charitable giving can be structured in ways that reduce your tax bill while increasing your impact.
Qualified Charitable Distributions (QCDs)
Many retirees save diligently in retirement accounts, such as 401(k)s or IRAs, during their working years. While this is a great strategy to reduce taxes during your working years, the downside is that withdrawals in retirement are taxable as income, and once Required Minimum Distributions (RMDs) begin, those taxes can add up quickly. I affectionately refer to this as a “Tax Tsunami” that can trigger a ripple effect on other income sources, Social Security, and even Medicare premiums.
One solution to this “Tax Tsunami” is to use a Qualified Charitable Distribution (QCD). Instead of withdrawing from your IRA and then writing a check to charity, you can direct funds straight from your IRA to a nonprofit. The gift goes tax-free to the charity, reduces your IRA balance, and counts toward your RMD. For 2025, individuals can give up to $108,000 per year through QCDs. It’s one of the most effective ways to reduce taxes while supporting causes you care about.
Gifting Appreciated Securities
Cash isn’t always the most efficient way to give. Many donors own stocks, Exchange-Traded Funds (ETFs), or mutual funds that have appreciated significantly in value. Selling those investments may result in a large capital gains tax bill.
Here’s an alternative approach. Imagine Susan bought stock years ago for $2,000, and today it’s worth $10,000. If she sells it, she will owe capital gains taxes on the $8,000 gain, typically taxed at a rate of 15-20%. Instead, if she transfers the stock directly to a nonprofit, the charity receives the full $10,000, and Susan avoids paying capital gains tax entirely. This strategy enables donors to fulfill their giving goals while avoiding a tax bill —a win-win for both sides.
Donor-Advised Funds (DAFs)
For donors looking for flexibility, a donor-advised fund can be a powerful tool. A DAF is essentially a charitable investment account. Here’s how it works: a donor first makes a contribution (cash or appreciated securities), then receives an immediate tax deduction, and can grant money to a nonprofit at any time.
This approach works exceptionally well in years when income is unusually high, for example, after a business sale, a large bonus, or a real estate transaction. By “bunching” several years’ worth of giving into one contribution, donors can maximize their tax deduction in that high-income year while still spreading gifts to nonprofits over time.
Key Deduction Limits
- Gifts of cash are generally deductible up to 60% of your Adjusted Gross Income (AGI).
- Gifts of appreciated securities or property are generally deductible up to 30% of AGI.
- Always consult with your financial advisor, CPA, or estate planning attorney before finalizing a strategy. Ideally, all parties should work together to align your charitable goals with your overall financial plan.
Final Thoughts
At its core, charitable giving is about making a meaningful impact. However, with some planning, you can often increase that impact while lowering your tax bill. Whether it’s using QCDs, gifting appreciated investments, or creating a donor-advised fund, the right strategy can amplify your generosity.
If you’d like to explore which approach best fits your situation, consider starting by clarifying your giving goals:
- How much do you want to give each year?
- Which organizations matter most to you?
- Do you anticipate any large income events in the future?
Answering these questions can help guide your plan and ensure that both you and the causes you care about benefit as much as possible.