Not All Charitable Giving Is Equal When It Comes to Taxes

With Giving Tuesday (Dec. 1) and the end of the year approaching, it’s the perfect time to think about charitable giving. And when it comes to that, I tell my clients there is no reason to give large amounts of cash. In fact, one of the first things I do is look at their tax return. If I see large amounts of cash being given, as I frequently do, I typically advise them to stop. This isn’t Scroogey advice to not give, but rather how to give in the most tax-efficient way. 

Let’s start with the basics of the tax law:

• Starting in 2026, one can actually give some cash and get a deduction even if they don’t itemize. The limits are $1,000 for single filers and $2,000 for married filing jointly (MFJ). The contribution must be directly to a 501(c)(3) charity but not to a donor advised fund (DAF). 
• Also starting this year, the One Big Beautiful Bill Act sets a 0.5% adjusted gross income floor before the itemized deduction benefits the client. This means itemizers can deduct charitable gifts only to the extent the gifts exceed 0.5% of their AGI. The first 0.5% of AGI in charitable contributions is not deductible for itemizers. In addition, the maximum benefit is limited to 35% even for those taxpayers in the 37% marginal tax rate.
• For those over 70.5 years old (at the time the gift was given), one can donate via a qualified charitable distribution (QCD) sent directly from an IRA to a qualified 501(c)(3) public charity. Each spouse can give up to $111,000 this year. The amount is not included as gross income.

Much to Ponder

Though there are many implications, one being that the tax benefit for itemizers is reduced. Let’s take an example of a married couple filing jointly and estimated $300,000 AGI and deductions of $27,200, or $5,000 below the standard $32,200 standard deduction for those under age 65. They want to give $10,000 to charity. The first $5,000 only gets them to the standard deduction which is then further reduced by another $1,500 (0.5% of the $300,000 AGI). They only get a tax benefit from the remaining $3,500. At a 24% marginal tax rate, this couple only saves $840. 

Advisor Mike Piper, also a CPA, has long been a proponent of bunching charitable donations, or giving larger amounts every few years. With the addition of the new 0.5% AGI floor, it becomes even more valuable. Using the example above, the couple giving $10,000 annually would save that $840 a year or $4,200 over five years. If they gave $50,000 in one year, they would save $10,440. That’s because both the thresholds for getting to the standard deduction and the 0.5% AGI floor only have to be met in one year rather than each of the five years.

Enter the DAF

A DAF is similar to a mini foundation. It’s a private charitable giving account administered by a 501(c)(3) public charity sponsoring organization. The couple in the example may not want all $50,000 to go to their charity in one year. In addition, they have a portfolio with large unrealized capital gains. They are allowed to give up to 30% of their AGI with appreciated securities held for more than one year. So, the $50,000 gift is well below the $90,000 limit for this couple. If they gift securities that had a $40,000 gain, they would avoid paying at least $6,000 in long-term capital-gains taxes at the 15% federal rate.

Common wisdom dictates gifting the securities with the highest gains, but this isn’t necessarily true. I often recommend a client give a holding that has a high gain along with a very high expense ratio. In addition, Adam Nash, CEO of Daffy, a low-cost DAF, also notes it may be beneficial to donate part of a highly concentrated holding of an individual equity.

The benefit of bunching with a DAF is threefold. One can get the tax benefit of bunching, eliminate future tax liability from a large unrealized gain and the donor can have the funds distributed to the charity over a period of years.  

DAFs have costs, however. Major brokerages such as Fidelity, Schwab and Vanguard have DAFs associated with their platforms that charge a percentage of assets in the account, typically starting at 0.60% annually plus the expenses of the underlying holdings. Daffy charges monthly fees that typically come out to be less. While the donor isn’t paying the ongoing fees, the higher the fees and the longer the funds stay in the DAF, the less that will go to the charity. One can usually move money from one DAF to another, as the DAFs are charities themselves. 

Qualified Charitable Distributions (QCD)

Age does have some privileges. As discussed earlier, those over 70.5 can donate via a QCD sent directly from an IRA to a qualified 501(c)(3) public charity. The donor must be at least 70.5 on the day the funds left the IRA. In every case I’ve examined, the tax benefit is superior to that of the DAF. That’s because the distribution is not included in adjusted gross income, and thus no thresholds to meet the standard deduction or the 0.5% of AGI floor apply. In addition, the funds coming out of the IRA for QCDs have no impact on Medicare Income-Related Monthly Adjustment Amount (IRMAA) premiums.

The Best of Both Worlds. Because QCDs are nearly always more tax-efficient than DAFs, one can combine the two strategies. A couple could fund a DAF with enough to approximate their giving until they reach 70.5 years old. Of course, these are estimates, since no one knows what the actual return on the DAF holdings will be. But the goal could be to fund the DAF through age 70 and later switch to QCDs. Thus, a client five years from being eligible for donating via a QCD could fund those years in the DAF and then plan on switching to donating via QCDs.

While taxes are not only complex, laws are constantly changing. Still, one should try to get the most tax savings from their charitable giving. I tell my clients that charitable intent must come first, and it’s their decision of how much to give. I don’t make value judgments, though most of my clients are very philanthropic. I also don’t suggest which charities to support, as we all have different causes we believe in.