1. Qualified Charitable Distributions (QCDs)

This is one of my favorites. A person can give straight from an IRA to a charity of their choice and avoid paying the tax entirely. This will show up on their taxes and allows them to give the same planned amount. It is straightforward to set up and easy to change, making it a great way to arrange an automatic monthly giving plan or just once a year. Also, it is a simple way to satisfy a “required minimum distributions” (RMD) for the year. This approach is also advantageous because you are able to give and get a tax benefit while still claiming the standard deduction. About any donor could use this strategy.

Ideal Donor

A person has enough income to live on in retirement from other sources and then uses all or a portion of their balances in their IRA(s) or old 401(k)s to create a lifetime income stream to give to charity.

Example

Dave and Becky have enough between their two pensions and social security to live comfortably in retirement. Becky also has an old IRA from a past job with about $200,000.  Becky and Dave are both adamant supporters of the military because their son served in Iraq, and they usually give $10,000 a year to Troopathon. Their annual income is about $120,000 per year and they file jointly, which puts them in the 22% Federal tax bracket. Prior to discovering the QCDs they used to take money from their IRA deposit it into their bank, pay taxes on it all, and then give the remainder to Troopathon. But now by using the QCD it saved them over $2,200 per year, plus possibly kept them in a lower tax bracket. Below is a chart showing specifically the money saved:

It is important to note that the money that would have been paid in tax, ($2,200 in this example) will just stay in the IRA and continue to grow and compound.  The trick is to send the money direct to the charity.  This strategy could be used by any person so long as they give, and they are over the required age of 70 ½.  Think of how impactful this could be over time, if you saved $2,200 over ten years that equals $22,000!

The Downside

There is no major downside to a QCD, except the obvious that you will not be getting the money, it will go to charity.  Also, it must be a qualified charity, which is somewhat limiting, as well as the person must be over age 70 1/2.

2. Donor Advised Fund (DAFs)

These are basically pools of money that are invested and have already been earmarked for giving.  The donor gets the tax deduction when they invest the money into the fund, but they don’t have to give it away immediately.  They work out well because you can invest the fund and hopefully have it grow, then give away a larger sum or spread out the giving over longer periods of time and multiple donors.  The growth is tax free and the specific charities who receive the money can change and adjust as desired.  These are like private foundations but more accessible for more average people.  They are a little tricky to set up and the donor would likely want to have significant assets to make it all worthwhile.

Ideal Donor

The ideal situation would be an affluent family with $500k or more in cash or investments that they have earmarked for giving.  Furthermore, they don’t necessarily want to give it all away right now and would like to remain in control of the decision on where to give money for decades to come.

Example

The Smiths have spent a lifetime building a successful business which they recently sold and generated over $1 million from the sale. The family already has enough assets to cover their daily cost of living. Mr. Smith credits much of his life's success to lessons and values he learned while serving in the Marines and would love to give back to a military cause like Troopathon. Both Mr. and Mrs. Smith feel a DAF is the right move for them to create impact while remaining in control and allowing their money to continue to grow. So, the Smiths use their financial advisor to help set up the account. They deposit $1 million cash into the DAF and immediately get a tax deduction because cash giving is deductible up to 60% of their adjusted gross income. Going forward the Smiths give between $50,000 to $100,000 per year from the DAF – all of which is not taxed. Furthermore, because the $1 million is still invested it has been growing by about $50,000 each year and all of which is 100% tax-free. The Smiths give the $50,000 to Troopathon each year. The actual tax savings of the deduction would be about $360,000, assuming they started the DAF with cash and their annual income is about $600,000 in that tax year. (60% of their income is $360,000).

One of the most powerful features of this account is that the money continues to stay invested and all the growth compounds entirely tax-free. The example below is if the couple is in the 20% long-term capital gains bracket meaning their income is over $553,850 per year and compares to if their investments are in dividend-paying stocks. The example below would be how much money they saved each year in taxes and isn’t even added in the upfront tax deduction which is a massive tax savings bonus too. The example highlights how they could save $10,000 per year in taxes by using the DAF.

The Downside

The biggest drawback to DAFs is that they are not super easy, free to establish, or fast like a QCD. They will take some paperwork because, in essence, you are opening another special type of investment account. Also, that will take a short amount of time, and the average cost per year to run one is about 1%. Lastly, once money is put into this account, it must be used for charity.

3. Giving Appreciated Stock

This is a strategy that would benefit a donor who already has stock (or any other asset) that has grown significantly in value. For example, a guy invested $100,000 in Apple stock and now it is worth $500,000. If he cashed in the stock, he would have to pay tax on the growth of $400,000. If instead he directly gave it to charity, then he would avoid owing any tax, and so would the charity. This is a simple and efficient way to give and simultaneously avoid tax. You also get a tax deduction for the value of the stock's value when you give them.

Ideal Donor

Imagine an investor who acquired a bunch of stock a long time ago and since then, the value is much higher than the original price paid. We can be talking about millions or even just thousands of dollars worth.

Example

Joan, a recent widow, is a huge supporter of the armed forces. Her late husband served, as well as her father, and now her youngest daughter. She has a calling to help support American troops overseas using Troopathon. Her husband spent his career working for UPS as a pilot and bought shares of the company back in the early years. Over the years, she and her husband invested $50,000 into UPS stock and the shares are now worth $500,000. In the example below we’ll assume Joan’s tax rate is 15% on long-term capital gains because her annual income is about $100,000 per year from other income sources. This strategy saved Joan $67,500 in tax!

The kicker on this strategy is that it does not have to be stocks, it can be real estate, baseball cards, or a classic car; it just needs to be considered an “appreciated asset.” She will also get a deduction equal to the $30,000 because you can give up to 30% of your adjusted gross income and get a deduction for it.

The Downside

There is basically no downside to these. Easy fast and super tax efficient. The only obvious tradeoff would be you are giving away an asset.

Alternating Giving Years

One last tip – Alternating Giving Years might be advantageous for people to lump two years of giving into one tax year. This would be if the donor does not itemize. The standard deduction now is so large ($27,700 in 2023 for married filing jointly) that many people just use that, but then are not able to itemize the giving. If instead the family doubled up all the giving in one tax year and then itemized that year; then in the next year take the standard deduction and you don’t have to give because you already basically prepaid it. This strategy will allow for capturing tax deductions from giving while also using the simplicity of the standard deduction.
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Please remember that taxes are complex, and I always recommend consulting a tax professional before making any tax decisions.