Giving to causes you care about is one of life’s most rewarding experiences. But how you give can affect both your impact and your finances. Understanding the options can help you give more effectively while staying mindful of taxes.
Donor-Advised Funds (DAFs)
A donor-advised fund is an account set up specifically for charitable giving. You can contribute cash or appreciated assets, like stocks or other investments you’ve owned for at least 12 months. If you give appreciated investments, you avoid paying capital gains taxes and get a tax deduction based on the investment’s current value. You can use the DAF as a “pass through” of sorts specifically for giving appreciated investments immediately after gifting it to the fund, or you can keep the funds invested letting them grow over time before you decide which charities to support.
Example: You have $50,000 in an investment account that you only put in $20,000 years ago. If you sell it and give cash, you’d owe capital gains tax on the $30,000 gain. Instead, if you gift the investments directly to a DAF, the fund can sell it tax-free, and you get a deduction for the full $50,000. You can then send grants to your favorite charities over the next few years.
- Pros: Flexible timing, ability to grow funds tax-free, can reduce taxes for many people that use this strategy.
Direct Giving
Direct giving is exactly what it sounds like: you give straight to a church or charity. The charity gets your gift right away. For some people, there’s something meaningful about physically writing a check, praying over it, and handing it to your church or favorite organization. That personal connection can make giving feel even more rewarding.
Example: You decide to write a $5,000 check to your church. The church receives it immediately, and you feel the satisfaction of knowing exactly where your gift is going and when it will be used.
- Pros: Immediate impact, personal connection, tangible giving experience.
Giving from Retirement Accounts (QCDs)
If you’re 70½ or older, a Qualified Charitable Distribution (QCD) allows you to transfer up to $108,000 (per person) directly from an IRA to a charity. The transfer counts toward your required minimum distribution (RMD), but it isn’t taxed as income. This can be a smart way to reduce taxable income while still giving generously.
Example: Your RMD is $20,000 this year but you only need $5,000 to cover living expenses. You direct $15,000 of it to a charity via a QCD. You satisfy part of your RMD, avoid paying income tax on that $15,000, and make a significant impact.
- Pros: Donated money counts towards satisfying your RMD without it counting towards your income
Tax Considerations
Recent tax changes make planning your giving more important. Seniors now get a higher standard deduction—$6,000 more if you’re 65 or older—so fewer people may itemize. This can reduce the tax benefit of charitable gifts, especially direct giving, unless you “bunch” multiple years of giving into one, but changes to state and local taxes may also make itemizing worthwhile again for some households.
When deciding how to give, it comes down to your priorities: immediate impact, flexibility, or tax efficiency. Direct giving is perfect for those who value the personal, tangible act of giving. Donor Advised Funds allow you to plan gifts over time and give appreciated assets tax-efficiently. Qualified Charitable Distributions offer a way to give directly from retirement accounts without increasing taxable income. Choosing the right method can help you maximize both the joy and the impact of your generosity.
Warm regards,
