Tax-efficient Charitable Giving

Tax-efficient Charitable Giving

July 05, 2021

Last year's Tax Cuts and Jobs Act increased the percentage-of-AGI limit on cash contributions from 50% to 60%, and the CARES Act (as extended by the Coronavirus Stimulus Act) further increased the limit from 60% to 100%(!) of your adjusted gross income (AGI), making it possible for the most charitable inclined people to fully offset their income and reduce their tax bill to zero! Yet as it turns out, reducing one’s tax bill all the way to nothing actually produces tax savings at the lowest tax brackets… such that in the end, the new 100%-of-AGI charitable giving limit actually is not such a great deal after all!

By spreading charitable contributions out over multiple tax years (and leveraging the five-year carry forward allowances for unused charitable contribution deductions), you can effectively offset income in years when they would be subject to higher tax rates, thereby producing a greater total tax benefit.

There are three options for tax-efficient charitable giving: Donor Advised Fund (DAF), Qualified charitable distributions from your IRA (QCD), and direct gift of stock. 

  1. DAF is easy to set up. You transfer your appreciated stock there and deduct the full market value. Let’s take Alphabet, you purchased for $4,584, market value now $51,281 (gain $46,697).  You can deduct the full $51K this year but distribute it to charities in future years. We manage DAF at TD and can sell that single stock, diversify into ESG funds and direct donations to various charities in any amount you say. DAF can be assigned to a family member to continue the legacy of charitable giving. It can be a great way to pass down family values and traditions.
  2. QCD from your IRA is another tax-efficient option. Taken in place of RMD, it reduces your income. So you can save 22%, which is your tax bracket. This year you took 2 months of RMD, so this option will work if we stop RMD monthly auto distribution.
  3. You can give a certain number of shares directly to charities, which are set up to receive stock gifts. We would need to set up each charitable organization’s account information, routing number link with your brokerage at TD. The gift should be more than your standard deduction so that you can deduct it.