It’s the Most Wonderful (and Charitable!) Time of the Year!
Tax-Efficient Ideas for Charitable Giving
By Kevin G. Henry
It’s hard to believe, but the holidays are just around the corner, which means it’s time to solidify your year-end and 2025 giving plans!
While the Standard Deduction (now $16,550 for Single persons over 65 and $32,300 for Married/Filing Jointly couples over 65; in 2025, $17,000 Single and $33,200 Married Filing Jointly) may limit the ability to itemize charitable donations, there are still good strategies for charitable giving that some people may use to either reduce their taxable income or avoid paying the charitable gift with after-tax money.
Below is a primer on some ways to structure charitable gifts, if you are so inclined. Most people are in a 15, 22, or 24 percent federal tax bracket. However, several of these giving strategies can offer an even better way to leverage charitable gifts with tax savings.
Strategies for People of any Age
Bundling Charitable Deductions. In order to itemize deductions, it can be advantageous for you to “bundle” and make all charitable contributions every other year to help you amass larger deductions and exceed your standard deductions amount. For example, in Year 1 you would take the standard deduction with little or no charitable giving, but save up the amount of planned gifts for Year 1 and then in Year 2 give the equivalent of two (2) years charitable contributions and thus be able to itemize your deductions on Schedule A in Year 2.[1] To help your charitable recipient’s budget, maybe give the “Year 1 gift” in January of Year 2, and Year 2’s amount in December of Year 2.
Donor-Advised Fund. An alternate way of “bundling” is to have your stockbroker set up a Donor-Advised Fund (“DAF”) account, into which you can periodically transfer cash, stocks or other securities. The amount you transfer is deductible as a charitable contribution (if it puts you above the standard deduction) in the year of the transfer. Then you may direct charitable gifts out of the DAF in any year (but you only get the deduction once). The DAF account remains invested and may grow tax‑free until distributed out, increasing the impact of your gift. All major stockbroker firms offer DAF accounts.
Direct Stock Gift Transfer. A great tax‑avoidance tax strategy is to make direct stock transfer gifts to a church or charity. If you own a regular securities brokerage account (not retirement), you can instruct your broker to make direct stock transfers as a gift to a church or charity. Typically, stock will have Unrealized Gain shown on your account statement, meaning that it has increased or appreciated in value above your original cost. If you personally sold this stock in order to use the net proceeds to fund a charitable donation, you would pay capital gains tax up to 15% on the increase in value. By making the direct stock gift to the church or charity, the charitable recipient pays zero tax and receives the maximum full current fair market value for the stock given, enabling the amount of your gift to be larger than if you sold the stock yourself before making a cash donation. Your church or charity will provide you or your stockbroker its own broker account information for the stock transfer. Stock gifts are deductible if you are eligible to itemize.
Strategies for Seniors over Age 70 1/2
Qualified Charitable Deductions (QCDs). If you are age 70 ½ and have an IRA and have started drawing Required Minimum Distributions (RMDs) from your IRA, you may instruct your account custodian to issue a check or wire transfer to a church or charity, instead of to you. The treasurer of your church or director of the charity will gladly provide its information to you. This qualified charitable distribution will count towards your RMD, with a limit of $105,000 per year.[2] This effectively lowers your taxable income, which is worth more than a deduction, compared to you receiving a cash RMD payment yourself, counting it in your taxable income and then giving a charitable donation after‑tax, and maybe not being able to count it as a tax deduction if you do not itemize.
Strategies for Charitable Giving at your Death
(a) Designating a church or charity as a beneficiary of a portion of your retirement account (IRA, 401k or 403b) – if not entirely needed for the later support of your spouse or a minor child – is an ideal way to forever avoid income tax on the tax deferred retirement account, since the charity pays zero tax. You can do this on a Beneficiary Designation form provided by your retirement plan administrator.
(b) Another reason you might want to use your taxable retirement account for charitable gifting is that non‑spouse beneficiaries of retirement accounts like children or grandchildren have to pay income tax on the entire amount of your retirement account they inherit within ten (10) years. They cannot “stretch out” the RMD payments over their life expectancy. Only your spouse can do that, and whatever is left in the retirement account at the death of your spouse will then be subject to the 10‑year non‑spouse beneficiary RMD rule.
(c) When doing income tax planning for gifts at death to your children and grandchildren, be aware that assets like your house, other real estate or a regular stock account receive a “stepped up” valuation for tax basis to current fair market value at your death. A charity does not need this increase in tax basis, but it would greatly benefit your spouse, children or grandchildren to inherit such property at stepped‑up value in case they later sell the inherited property. Therefore, if you have charitable inclinations at your death, think first about using tax‑deferred retirement accounts for death charitable giving, and leaving other appreciated property held in your individual name or in a Revocable Trust to family members at your death.
(d) Important Note: Do not use a Roth IRA or Roth 401k for your charitable giving – you have already paid tax on it and it can go to your spouse and/or family members completely tax‑free.
Disclaimer
Always consult with your accountant, tax preparer or investment advisor before you make decisions about stock gifts, QCDs from an IRA, bundling charitable gifts, or other estate planning. The above are only general concepts that may not be of significant benefit or suitable for your particular income and tax situation or objectives.
Kevin G. Henry is a business and trusts and estates attorney at Sturgill Turner. He can be reached at khenry@sturgillturner.com or (859) 255-8581. This article is intended as a summary of some federal tax provisions and does not constitute legal advice.
[1] Schedule A deductions typically include (a) a total of $10,000 for state and local income tax and property taxes (the “SALT deduction”), plus (b) home mortgage interest you pay. So if adding your charitable gifts would cause the total of all those deductions to be greater than the standard deduction amount, you can itemize for that year.
[2] To report your QCD as a reduction of your taxable income (not a “deduction” on Schedule A), go to line 4 of your Form 1040 where you report IRA distributions. You receive a Form 1099-R from your IRA custodian. Enter the full Distribution amount it shows on line 4a of your tax return. Then subtract the QCD amount sent to charity and enter the difference on line 4b Taxable Distributions (even if it is $0) write “QCD” beside it. This will reduce your Adjusted Gross Income (“AGI”) at the bottom of page 1 of your tax return. Do not claim a QCD charitable gift as a deduction on Schedule A, Itemized Deductions.