How can you maximize tax deductions when donating to charity?

Charitable donations can benefit the causes you care about while potentially providing you with tax deductions. Choosing exactly how and when to make your donations, however, should be an important part of your tax planning.

Consider the following strategies to help maximize the benefits of your charitable gifts, both for your family and the charity.

1. Gift appreciated property to avoid capital gains

If you have unrealized gains in securities or other assets that you’ve owned for more than one year, consider gifting a portion to charity. This way you avoid the capital gains that you would incur if you sold the assets. It is possible to receive an income tax deduction equal to the full fair market value of what you give away, even if your original cost for acquiring them was much lower.

For example, if you previously invested $20,000 in a stock that is now worth $100,000, you could sell the stock, recognize capital gains of $80,000, and donate the remainder, resulting in charitable deduction of $80,960 ($100,000 less $19,040 [$80,000 capital gain x 23.8% federal rate] in taxes).

Alternatively, you could give the stock to charity. The charity receives a $100,000 benefit since it can sell the stock tax-free. Meanwhile, you receive a potential income tax deduction of up to $100,000, which is more than the $80,960 deduction you would receive by selling the shares first. The total benefit to you and charity would be significantly greater by donating appreciating stock when compared to gifting proceeds from its sale.

2. Time your gifts wisely, based on your income expectations

If you expect to receive an influx of income, such as a large bonus or proceeds from the sale of a business, consider making a larger donation in the same calendar year. But be mindful of the type of charity you choose. To ensure availability of the maximum deduction (60% of your AGI if the donation is in cash), you need to give to a public charity. If you’re uncertain on the charities, you can use a donor advised fund (DAF).

A DAF allows donors to make a completed gift to a public charity and receive the maximum potential tax deduction immediately. The assets are held in the fund, and you can advise on the disbursement to charities you eventually decide to support.

We recently assisted a client who sold her business and was facing a substantial tax bill. Her philanthropic goals were already established—she was donating $10,000 every year to various charities. To help offset the spike in income in that year, we recommended that the client front-load a DAF. She was able to contribute $100,000 within a few days, which happened to fall between Christmas and New Year’s Day. She then claimed a charitable deduction for the full contribution on her income taxes for the current year—reducing the tax burden generated by the sale of her business while setting aside funds to fulfill her charitable giving for years to come.

3. If you are 70.5 or older, gift IRA assets

Due to their fully taxable nature, traditional IRA assets are also a natural choice to fund charitable gifts during your lifetime. If you are 70.5 or older, you can transfer up to $100,000 (indexed beginning in 2024) per year directly to a charity, tax free. You won’t get an income tax deduction for the gift, but the amount is not included in your gross income. The other major benefit: charitable distributions count toward the required minimum distributions that you must make each year if you are over 73. The Consolidated Appropriations Act, 2023 (referred to as SECURE Act 2.0) expanded this benefit to include an additional $50,000 lifetime contribution to a charitable gift annuity or charitable remainder trust. For more about how provisions in the Secure 2.0 Act might impact you, see What Does the Secure 2.0 Act Mean for Your Retirement?

4. Consider a charitable trust

There are two basic types of charitable trusts: Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs). Today’s interest rate environment affects both.

CRTs provide you or your beneficiaries with a stream of income over the life of the trust and turn over the remaining assets to a charity at the end of the trust’s term. How much of your contribution is tax-deductible depends on the present value of the remainder interest in the trust, which is determined by an IRS calculation.

CLTs work the opposite way, making annual contributions to a charity and distributing the remaining assets to beneficiaries at the end of the trust’s term. With a CLT, you receive a deduction based on the present value of the stream of distributions the CLT makes to charity. Generally, a CLT is a more favorable option when interest rates are low, since lower rates increase the present value of the charitable gift, thereby increasing your potential tax deduction. In addition, any appreciation of the trust assets above the IRS-calculated interest rate results in a tax-free gift to your beneficiaries.

5. Name a charity as the beneficiary of your retirement plan

If you plan to leave money to charity at your death, you should always consider having the funds paid out from your IRA or other tax-deferred retirement plan. Leaving all or a portion of your IRA to charity can provide much greater tax advantages to your heirs than donating assets from a non-retirement account.

Unlike non-retirement assets, your individual beneficiaries will typically need to pay income tax when they pull money out of a traditional IRA or 401(k) plan they inherit from you. And, if your estate is valued above the current estate tax exemption amount ($13.61 million in 2024; $27.22 million for a couple), these assets may only reach your beneficiaries after being subject to estate tax at 40%. Ultimately, your beneficiaries may receive less than 50 cents on the dollar from your account, depending on their tax brackets and your estate tax situation. A charity, in contrast, is not subject to estate or income tax and will receive 100% of the funds.

You also don't need to leave the entire retirement account to charity. You can leave a percentage or a specific dollar amount and still reap a tax benefit. You can also leave your retirement account to a charitable remainder trust and yield benefits for individual beneficiaries and a charity.

6. Give your spouse a tax deduction

Although many people include bequests in their wills, giving directly to charity during your lifetime can be both much more personally gratifying and much more beneficial from a tax perspective. You can claim an income tax deduction, which you can’t do with a gift at death, while also removing the assets from your estate for estate tax purposes.

One way to provide for a charity at your death while not sacrificing the income tax benefit is to ask your spouse to make the donation if you die first. Your will or trust might leave a specific amount to your spouse, with the request (but not the direction) that he or she donate the amount to the charity. Or you might leave your spouse a letter or simply trust them to remember your request. If your spouse dies first, then you would give the amount to the charity yourself. Of course, this is a non-binding request, so you’ll want to be confident that your spouse will honor your wishes.

Check with charities

As you consider which strategies are best to maximize your charitable contributions and tax deductions, you may need to consult with the charity on its Gift Acceptance Policy to ensure they can receive the assets you are wanting to contribute. While it is not a requirement to connect with the charity ahead of a donation, developing open communication often yields more personal satisfaction with a gift and more meaningful influence to the causes you care about.