The United States stands as one of the most charitable nations globally, consistently ranking in the top five of the World Giving Index. Our tax system incentivizes charitable giving, notably through the federal estate tax of 40% on assets above $13.61 million, which likely has influenced the ~200 U.S. billionaires who have signed the Giving Pledge to donate most of their wealth to charity.

The Tax Cut and Jobs Act (TCJA) of 2017 shifted the landscape of tax planning, making charitable deductions one of the remaining significant tools. The TCJA removed many miscellaneous deductions and capped State and Local Tax (SALT) deductions, while also doubling the standard exemption. As a result, most Americans no longer itemize deductions. However, charitable planning has gained prominence for those capable of making substantial donations.

Understanding the basics of charitable planning can initially seem complex. Here’s a simplified overview we came up with for clients (We would note this is not exhaustive advice; please consult your CPA or tax advisor regarding your specific situation):

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Tax Deductibility

The TCJA of 2017 doubled the standard deduction on personal tax returns, with the 2024 standard deduction being $14,600 for single filers and $29,200 for married couples filing jointly. If your total deductions (including mortgage interest, SALT, and charitable donations) are below this threshold, you may not need to track charitable receipts as diligently as before.

Donations to public charities with 501(c)3 status can be made in cash or property. Cash contributions are deductible up to 60% of your Adjusted Gross Income (AGI). For property donations, there are two categories: tangible goods like those donated to Goodwill (deductible up to 50% of AGI at fair market value) and appreciated property like stocks (deductible up to 30% of AGI). Unused donations can be carried forward for up to five years.

To summarize: the deductibility of your charitable donations varies based on whether you give cash, goods, or appreciated securities.

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Donating Appreciated Securities

Donating appreciated assets like stocks can address two tax issues simultaneously. You can deduct the fair market value of the shares and avoid paying capital gains tax. These donations are limited to a 30% AGI deduction. Ensure you’ve held the stock for over a year to qualify for long-term capital gain status. When deciding which stocks to donate, you can either target those with the highest percentage gain or use the donation to reduce concentration risk in your portfolio.

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Donor-Advised Funds (DAFs)

DAFs are charitable investment accounts that can streamline tax planning for charitable deductions. Contributions to a DAF are deductible in the year they are made, even if the funds are distributed to charities over several years. This allows for "bunching" donations into a high-income year to maximize deductions. DAFs are also convenient for donating appreciated stock, especially if the recipient charity cannot accept stock donations directly.

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Qualified Charitable Distributions (QCDs)

QCDs allow you to donate up to $105,000 annually (in 2024, indexed to inflation) directly from your IRA to a charity, avoiding income tax on these withdrawals. This strategy can satisfy your Required Minimum Distributions (RMDs) without increasing your taxable income. Initiate QCDs early in the year to ensure timely execution.

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Charitable Deductions and Roth Conversions

Combining charitable deductions with Roth conversions can be a powerful tax strategy. By converting traditional IRA assets to a Roth IRA in a year with high charitable contributions, you can offset the conversion’s taxable income. This approach works best in years with lower overall income, such as early retirement.

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Charitable Intent and Philosophy

Of course, other approaches exist, such as setting up an “official” Private Family Foundation or creating Charitable Trusts (CRUTs, CLATs, etc.) While tax strategies are beneficial, the impact of your donations is paramount. Deciding where to donate requires personal reflection and research, but the key is to start, even if it’s not perfect. Understanding and leveraging these charitable planning strategies can enhance your philanthropic impact while optimizing your tax situation.

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