Your wealth has the potential to change lives and communities for the better through charitable giving. With a thoughtful donation strategy, you have the potential to save a lot of money in personal and estate taxes. This strategy can help you protect and grow generational wealth. As of 2024, you can generally deduct charitable cash donations up to 60% of your AGI.1 However, the deduction cap will probably revert to 50% of AGI when key provisions of the Tax Cuts and Jobs Act (TCJA) sunset at the end of 2025.2 This makes the next two years especially valuable for you to maximize the tax benefits of your donations.
Americans collectively give around $450 billion to charity every year,3 with individuals accounting for 60% to 70% of these funds.4 Charitable deductions increase alongside household income: People with an AGI of over $250,000 may have an average annual charitable donation deduction of nearly $50,000.5 This underscores the tremendous impact that personal donations can make on society and your tax exposure.
The U.S. boasts over 1.54 million charitable organizations,6 offering an array of causes you can direct your contributions to. Maybe you’re passionate about a particular charity’s work, or perhaps your top priority is to build a legacy that supports your personal beliefs and interests. You can incorporate one or multiple charitable giving strategies into your financial plan, and you can even use your giving to create additional income streams in retirement.
Here, we cover 11 advanced giving strategies that span four key categories:
- Donor-directed giving
- Immediate-impact giving
- Income-generating donations
- Legacy giving
With guidance from an advisor at RWA Wealth Partners, you can tailor your charitable giving plan to reflect your personal aspirations and financial goals. We can help you align every dollar you donate to your vision of making a meaningful difference now or in the future.
Personal tax rates are probably going in one direction: Up.
Donor-directed giving
With donor-directed giving, you’re closely involved in guiding where your money goes and who it helps. In contrast, when donating to large general funds or international aid organizations, you may have less visibility and control, making it difficult to track how charities use your contributions. Whether you want to help provide nutritious meals to kids in your city, fund reforestation projects, build libraries in underprivileged schools or fight disease, donor-directed giving lets you channel your support toward the causes that are important to you.
Let’s look at some charitable giving options that empower you to take a more active role in your charitable giving.
1. Donor-advised funds (DAFs)
A DAF is like your own personal charitable giving account. Once you deposit your funds, you can recommend grants from this account to a variety of IRS-qualified public charities.7 When you set up a DAF, you not only simplify and consolidate your charitable giving, but you also potentially make a bigger impact through tax advantages and investment growth.
A sponsoring organization, typically a public charity, manages your DAF. It administers the fund, handles all legal and tax-related aspects (including issuing tax receipts), and takes responsibility for investing the assets in the fund.8 Although the organization makes the final decisions on grants to charities, you keep advisory privileges and consult on distributions, ensuring your voice is heard.
‘Bunching’ your donations
One enormous advantage of DAFs is the opportunity to “bunch” your charitable donations.9 Instead of making smaller, annual charitable contributions, you contribute a larger sum to your DAF in a single tax year (so long as it does not exceed the IRS thresholds of 60% of AGI for cash contributions and 30% for appreciated assets). This could be a combination of what you might normally give over several years.
When you make this sizable contribution to your DAF, you receive a tax deduction for the entire amount in the year you donate—but the charitable distributions from your DAF can be made in future years. It’s beneficial to contribute to a DAF when you expect to be in a higher tax bracket, because you could theoretically receive a deduction for your entire DAF contribution, subject to the AGI limitations above.
2. Private foundations
If you want to center your charitable giving around a certain cause and become even more involved in philanthropy, a private foundation might be your ideal option. For instance, you could establish an entire foundation focused on educational initiatives, medical research, environmental conservation or support for the arts.
Private foundations function as nonprofit organizations that manage their own charitable activities, grants or both.11 With this arrangement, you can closely align your charity work to your values and interests. Unlike with DAFs, which a sponsoring organization controls, you make independent grant decisions, employ staff, and set up scholarships or direct grants to individuals. A private foundation offers more control because it gives you direct oversight of your charitable activities.
With this greater control, however, comes increased responsibility. You have to take on more of the administrative work and deal with stricter regulations and higher operating costs. But these trade-offs can be worth it if your priority is to take a long-term, highly personalized approach to your philanthropy.
Public vs. private charitable deduction limits
Private foundations can provide an immediate tax deduction of up to 30% of your AGI for cash contributions and up to 20% for long-term appreciated publicly traded assets. They also enable you to potentially eliminate capital gains taxes on gifts of long-term appreciated securities. Additionally, private foundations can accept a diverse range of asset types, offering greater flexibility in charitable contributions.12 However, these tax benefits may be less favorable than those offered by other donation options. For example, donations to public charities or donor-advised funds allow for higher AGI deduction limits—up to 60% for cash gifts and 30% for long-term appreciated securities.
3. Designated funds (DFs)
You can also set up a DF to create a charitable fund for a specific purpose or beneficiary. Unlike a DAF, where you have the flexibility to recommend or choose a variety of charitable recipients over time, a DF is typically set up to benefit one or more predetermined charities or causes.13
For example, you might establish a DF at a community foundation to support a local art museum, a school, or a specific program within a nonprofit. Once you create this fund, it regularly distributes funds to the chosen organization(s).
This differs from a DAF, where you can advise on which charities to support and when to distribute grants without committing to specific beneficiaries from the start. And in contrast to a private foundation, a DF lets you administer a designated fund more simply and at a lower cost. It doesn’t require its own legal structure or board. A hosting institution, like a community foundation, manages it.
If you’re looking for a way to provide ongoing support to a particular charity or cause without the need for active involvement in grant-making decisions, a DF is a great option.
4. Field-of-interest funds
With a field-of-interest fund, you create a charitable fund focused on a specific area or issue that you’re passionate about, instead of supporting a specific organization.14 For instance, you might be interested in supporting environmental conservation, education, health care or the arts. This fund will make grants to various organizations and projects within your chosen field.
Unlike a DF, which supports specific charities, a field-of-interest fund allows for broader support across various initiatives within a particular area. The organization managing your fund identifies and funds projects or nonprofits that align with your interests. This approach offers flexibility, as the specific beneficiaries can change over time while staying within the scope of your chosen field. It’s a great way for you to make an ongoing impact in an area you care about.
Immediate-impact or direct giving
Some charitable giving strategies provide the opportunity to make direct and prompt donations to charity. Unlike strategies involving DAFs or private foundations, where you may set funds aside or let them grow over time before distribution, immediate-impact giving puts your charitable dollars to use right away. This can be ideal if you want to make an impact now without the complexities of managing or investing the funds. Direct giving also provides you with a potential tax deduction in the year you make the donation, which can be beneficial in high-earning years.
Here are some examples of immediate-impact giving strategies.
5. Qualified charitable distributions (QCDs)
When you make a QCD, you directly transfer funds from your IRA to the qualified charity of your choice. This means that the charity receives the donation right away and can start using the funds immediately to support its programs and initiatives.
QCDs also create tax benefits that can be part of your retirement strategy. You’re required to take minimum distributions (RMDs) from your tax-advantaged IRA accounts starting at age 7215 (73 if you reached age 72 after Dec. 31, 2022), and these RMDs count as taxable income. To avoid moving into a higher tax bracket, consider making a QCD from your IRA. A QCD allows you to transfer your RMD directly to a qualified charity and exclude that amount from your taxable income. At age 70 ½ you can exclude up to $100,000 of QCDs from your gross income every year. If you’re married, and you’re both over age 70 ½ and have IRAs, you can each exclude up to $100,000 for a combined total of up to $200,000 per year.16
6. Direct donation of appreciated stocks and securities
Gifting non-cash long-term appreciated assets, like stocks, bonds or mutual fund shares held for at least one year, offers unique tax advantages to you and the charity.17 When you give appreciated assets (vs. cash) directly to charities, you can avoid capital gains taxes and make a larger contribution with the savings. You receive a tax deduction equivalent to the asset’s full market value, subject to AGI limitations. The charity benefits from a larger donation, and you enjoy a greater tax deduction.
7. Direct cash donations
Sometimes, you just want to write a check. When you donate cash directly to a charity, your contribution provides immediate help to the organization. This straightforward method is a common way to support charities. You can deduct the amount of your cash donation from your taxable income, which can reduce your tax bill if you itemize your deductions rather than take the standard deduction . However, the tax savings from cash donations might not be as substantial as those from donations of appreciated stocks or securities.
Let’s break it down into the two scenarios.
- You sell securities worth $100,000 that you bought for $70,000.
- You owe capital gains on the difference ($30,000) at a rate of 20%.
- You donate the cash from the sale to charity.
Donating securities directly:
- You give securities worth $100,000 directly to the charity.
- You owe nothing in capital gains because you aren’t selling the asset.
Here’s the difference in your donation and tax scenario, assuming the donations don’t exceed your charitable deduction limits.
| Selling Securities and Donating Cash | Donating Securities Directly | |
|---|---|---|
| Cost Basis | $70,000 | $70,000 |
| Current / Appreciated Value of Donation | $100,000 | $100,000 |
| Long-Term Capital Gains of 20% | $6,000 | $0 |
| Resulting Charitable Donation | $94,000 | $100,000 |
| Additional Amount To Donate to Charity | $0 | $6,000 |
| Tax Deduction | $94,000 | $100,000 |
Income-generating donations
Some types of charitable giving strategies allow you to give a substantial amount to charity while receiving a steady income stream for yourself or your beneficiaries for a specified period. You receive an immediate tax deduction for a portion of your donation, and after the income payment period ends, the charity benefits from the remaining assets in the trust or annuity. This approach lets you fulfill your charitable goals, provides financial benefits to you or your loved ones, and supports the charity with a significant gift.
Here are some options for income-generating donations.
Think of the current estate tax breaks as a limited-time offer.
8. Charitable gift annuities (CGAs)
With a CGA, you donate to a charity and receive a fixed income stream.18 Ideal for retirement, CGAs offer stable lifelong payments, with the charity benefiting from the remaining balance of the initial donation after all the scheduled annuity payments have been made to you. When you set up a CGA, you will receive an immediate charitable tax deduction for a portion of your gift. This deduction is calculated as your contribution amount minus the current value of the payments you’re set to receive.19
However, not all the income you receive is guaranteed to be tax-free. When you fund a CGA with cash, a portion of the payments you receive will generally be taxed as ordinary income. If you fund it with appreciated securities or real estate you’ve held for more than a year, a portion may count as ordinary income, a portion may incur capital gains taxes, and some you may receive tax-free.20
Each year, the charity issuing the CGA provides a Form 1099-R detailing how to report these payments for tax purposes.21 Since tax implications can be complex, you should talk to the charity representatives and your financial advisor for specific guidance on your CGA’s tax treatment.
If you’re interested in setting up a CGA, first check if your preferred charity offers them. If it doesn’t, you have the option to arrange one through a community foundation. This way, you can still support the cause or organization of your choice using your preferred method.
9. Charitable remainder trusts (CRTs)
Depending on your income needs, a CRT might be beneficial. It lets you transfer assets into a trust, and then you or your designated beneficiaries receive income from the trust for a set period. This period can be up to 20 years or throughout the life of one or more beneficiaries. After this period or your passing, the trust gives the remaining assets to the designated charity. Your contributions to a CRT can qualify for a charitable deduction, calculated as the donated assets’ value minus the annuity’s present value.
Keep in mind that CRTs have some restrictions.22 For instance, when the last income beneficiary passes away or at the end of the trust’s term, the remaining assets that go to the charity must be at least 10% of the initial net fair market value of all assets placed in the trust. Payments from the CRT are usually taxable, starting as ordinary income, then as capital gains, and eventually as tax-exempt or principal amounts. And be aware that CRTs are irrevocable, meaning once you transfer assets into them, you can’t reverse the decision.
Legacy giving
Legacy giving allows you to designate a part of your estate to a charity. This approach enables you to support your favorite causes throughout generations while preserving your wealth for your family’s inheritance.
Let’s look at some legacy giving options that can help you thoughtfully balance supporting your loved ones and contributing to charities.
10. Charitable lead trusts (CLTs)
CLTs initially direct a portion of your assets to a chosen charity for a set period and then transfer the remaining assets to your family. This is essentially the opposite of a CRT.
CLTs can be set up during your lifetime or through your will, and there are two types. The first type is a charitable lead annuity trust (CLAT), which pays a fixed annual amount. The second type is a charitable lead unitrust (CLUT), which pays a yearly percentage of the trust’s value.23 You can structure payments to the charity as either fixed or variable, affecting the end value of assets for beneficiaries. Depending on the trust type, you might get an immediate tax deduction, reduce estate taxes or provide gift tax benefits. Always consult with your advisor for tailored advice. They can help you navigate the complex IRS rules surrounding CLTs.
11. Life insurance policy designations
You might want to consider using a life insurance policy for charitable giving. For example, if you have a policy with a $2 million death benefit, you can name a charity as the beneficiary for all or part of it. Upon your passing, the designated amount is directly transferred to the charity, making a significant impact. This not only supports a worthy cause, but it can also reduce your estate tax liability.
When considering this option, assess how it fits into your overall estate plan, and think about its impact on your family. You should also regularly review your policy and beneficiary designations to confirm that they align with your intentions. And be sure to discuss your plans with the charity to understand how it will use the funds.
Strategic giving benefits you and your charities of choice
It’s rewarding to see how your wealth can make a difference through charitable giving that aligns with your passions and values. Proactive gifting is also a vastly underrated pillar of a tax-efficient wealth management plan. It often takes a back seat to tax-saving methods such as retirement accounts or capital gains management.
There’s a wide variety of flexible charitable giving strategies that can be tailored to your needs and goals. If you haven’t reviewed your opportunities to reduce your personal and estate taxes while making a positive impact on your chosen charities, now’s the time. Otherwise, you might pay millions of dollars in unnecessary taxes while neglecting opportunities to design a more significant legacy. Strategies like DAFs, private foundations and charitable trusts can help you achieve tax efficiency while creating meaningful change. Call us today to discuss your charitable vision. Together, we can establish a plan that reduces your tax burden and accomplishes more with your wealth.
Sources:
1 Internal Revenue Service. (n.d.). Publication 526 (2022), charitable contributions.
2 Congressional Research Service. (2023, November 21). Reference table: Expiring provisions in the “Tax Cuts and Jobs Act” (TCJA, P.L. 115-97). CRS Reports.
3 Giving Tuesday [@givingtuesday]. (2020, September 18). Americans give $450 billion to charity ever year, but only a fraction goes to Black organizations. @giveblck is a new [Photograph]. Instagram. https://www.instagram.com/p/CFSzcs3n4Ls/
4 National Philanthropic Trust. (n.d.). Charitable giving statistics.
5 Appel, E. (2022, June 13). Charitable giving statistics in 2023. Kindness Financial Planning.
6 National Philanthropic Trust. (2023, June 20). Charitable Giving Statistics. NPTrust.
7 Internal Revenue Service. (n.d.). Donor-advised funds.
8 Fidelity Charitable. (n.d.). What is a private foundation?
9 The Catholic Community Foundation. (2023, September 25). Why bunching donations today makes sense for tomorrow.
10 American Endowment Foundation. (n.d.). 5 primary tax benefits to donors.
11 Internal Revenue Service. (n.d.). Private foundations.
12 Fidelity Charitable. (n.d.). What is a private foundation?
13 National Philanthropic Trust. (n.d.). Other giving vehicles.
14 East Bay Community Foundation. (n.d.). Field of interest fund.
15 Internal Revenue Service. (n.d.). Retirement plan and IRA required minimum distributions FAQs.
16 Internal Revenue Service. (n.d.). Reminder to IRA owners age 70½ or over: Qualified charitable distributions are great options for making tax-free gifts to charity.
17 Fidelity. (n.d.). Increase your tax savings on charitable giving.
18 American Council on Gift Annuities. (2022, June 28). Donor guide to gift annuities.
19 Ren. (n.d.). Charitable gift annuity.
20 Ren. (n.d.). Charitable gift annuity.
21 Internal Revenue Service. (n.d.). Instructions for Forms 1099-R and 5498 (2023).
22 Internal Revenue Service. (n.d.). Charitable remainder trusts.
23 Westley, R. A., & Barral, D. M. (2021, December 1). Planning with charitable lead trusts. The Tax Adviser.
Disclosures:
This material is distributed for informational purposes only and is not financial or investment advice. Speak to your financial advisor before taking specific action. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with RWA Tax Solutions, LLC. We do not provide legal advice nor sell insurance products. Always consult a licensed attorney, tax professional or licensed insurance professional regarding your specific legal or tax situation or insurance needs.
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