Optimize Your Charitable Gift

Charitable giving does more than support causes you care about — structured correctly, it can also be one of the most tax-efficient moves you make in a year. Below we walk through the most useful vehicles, explain when each is likely to be the best choice, and call out one important recent change: the OBBBA above-the-line small-donation benefit for non-itemizers.

Qualified Charitable Distributions (QCDs) — best for IRA owners seeking AGI relief

QCDs are direct transfers from an IRA to an eligible public charity that are excluded from taxable income and can count toward required distributions. Because they reduce adjusted gross income (AGI), QCDs can preserve income-sensitive tax benefits and credits in ways that ordinary charitable deductions sometimes cannot. QCDs must be issued directly by the IRA custodian to the charity, and they are not eligible to be sent to donor-advised funds or private foundations — QCDs must reach qualifying operating charities directly.

When to consider a QCD:

• You are drawing from an IRA and want to reduce AGI (for example, to limit surtaxes or preserve phase-outs).

• You want to satisfy some or all of your RMDs while supporting charities directly.

Donor-Advised Funds (DAFs) — the “spike year” and bunching tool

DAFs are simple, flexible accounts sponsored by public charities where you place cash or appreciated assets now, claim the tax deduction in the funding year, and then recommend grants to operating charities over time. For a client who has a one-time large income event, donating to a DAF lock in the deduction and while giving you breathing room to select final grantees later.

The idea here is to bunch multiple years’ worth of giving into a single tax year to help offset the income “spike”. As an added benefit, donations can also be made in appreciated securities, which give the added benefit of avoiding capital gains taxes.

Limits to keep in mind:

• DAF sponsors charge administrative and investment fees.

• Donor recommendations to a DAF are advisory rather than legally binding, although in practice, the charitable organization will make the “advised” donation to any qualified charitable organization the donor desires.

Donating Appreciated Securities — how to maximize the charitable dollar

Donating long-term appreciated publicly traded securities directly to a qualified charity typically lets you deduct the fair market value and avoid capital gains tax that would arise from a sale. This generally increases the after-tax value of the gift to the charity compared to selling then donating the cash.

Key timing point:

• A charitable securities gift is effective for tax purposes when the charity (or the charity’s account at a broker/DAF sponsor) actually receives the securities. Brokerage transfers can take time; if you want a deduction in a particular tax year, initiate the transfer early enough that the shares post to the recipient’s account before year-end. 

Documentation:

• Maintain transfer confirmations and contemporaneous acknowledgments from the charity; for noncash gifts there are IRS substantiation rules that, if followed, are the best defense to any inquiry.

Split-Interest Vehicles (CRTs & CLTs) — when income and legacy goals intersect

Charitable remainder trusts and charitable lead trusts are more sophisticated structures that let you achieve dual objectives: lifetime income for the donor or heirs and a meaningful legacy gift to charity. These tools are best evaluated for clients with very large appreciated positions, estate-tax concerns, or a desire to convert illiquid, highly appreciated holdings into diversified income streams. They require legal, tax, and trustee setup — they’re powerful but not first-line for most givers. 

OBBBA’s Small Above-the-Line deduction — a new option for non-itemizers

A recent policy change created an above-the-line deduction for modest cash charitable gifts by taxpayers who take the standard deduction. This change gives an immediate, limited tax benefit to small donors who don’t itemize. Important practical notes: the benefit applies only to cash gifts to qualifying public charities and excludes contributions to donor-advised funds, private foundations, and certain supporting organizations. In short: small cash gifts to operating charities are now modestly more tax-friendly for non-itemizers, while larger giving strategies (DAFs, QCDs, securities gifts) remain the workhorses for tax-sensitive philanthropy.

Planning and implementation of a charitable gifting plan can take time, so now is the time to act to ensure that your intentions are fulfilled before the end of the tax year. However, before you act, talk it over with your financial advisor. A quick conversation can turn a good intention into a smart, tax-efficient gift that suits your cash flow, tax picture, and philanthropic goals — and can help you avoid costly timing or documentation mistakes. Your advisor can run the numbers with you, coordinate with your tax and estate counsel if necessary, and recommend whether a QCD, DAF, direct gift of securities, or a split-interest vehicle best meets your objectives. If you’re a WRFA client, reach out to your advisor to schedule a charitable-planning review; if not, we’re always happy to help you explore options and model scenarios tailored to your situation.

Disclosure: The information provided in this blog post is for educational and informational purposes only and should not be construed as financial advice. While we strive to present accurate and up-to-date information, the financial, tax, and legal landscape is subject to change, and individual circumstances vary. Readers are encouraged to consult with a qualified financial advisor or professional before making any financial decisions or implementing strategies discussed in this post. Our firm does not guarantee the accuracy, completeness, or suitability of the information provided, and we disclaim any liability for any direct or indirect damages arising from the use of this information. Past performance is not indicative of future results. Any investment involves risk, and individuals should carefully consider their financial situation and risk tolerance before making any investment decisions.