Building a Purposeful Charitable Legacy

The Impact of Charitable Giving

Charitable donations in the United States recently reached an all-time high, surpassing $550 billion in contributions in 2023. This remarkable figure underscores the generosity of individuals across generations committed to supporting various causes, from education and healthcare to religious organizations to environmental conservation and animal welfare. In addition to the enormous social impact charitable giving can have, it also has the potential to create significant tax benefits, especially when considered in the context of lifetime giving and as part of a robust estate plan.

Understanding the Basics

When it comes to maximizing the impact and tax benefits of giving during your lifetime, it helps to have an understanding of the rules surrounding charitable income tax deductions. The amount you can deduct from a charitable gift will largely depend on two factors: what we give and where our gift goes.

What We Give

By and large, we’re donating cash – according to the U.S. Trust Study of High Net Worth Philanthropy, nearly 90% of all charitable gifts are made in cash. While this strategy might be the most convenient option for giving, you have other giving options that can create a greater tax benefit.

For example, if you’re considering a gift of marketable securities (i.e., assets that can be bought or sold on a public market, like stocks or bonds), an important distinction to make for tax purposes is how long you have owned them: Securities that are held for one year or less are considered short-term holdings, while those held for at least one year and one day are considered long-term holdings. That distinction is important for tax purposes: Short-term holdings are deductible only up to the cost basis (i.e., what you paid for it), and the difference between that cost basis and its current fair market value is taxable. By contrast, long-term holdings are deductible up to the fair market value itself, and the donation does not create a taxable event.

Where Our Gift Goes

While typically the amount you give contribute to a charity is fully deductible, the IRS has placed limits on how much of a charitable deduction you can take in any given year based on your adjusted gross income – any amount that exceeds that AGI limit would need to carry over to the following year. Importantly, those IRS limits will vary by the kind of organization you’re donating to. For example, if you’re donating to a public charity, the deduction for gifts of cash is capped at 60% of your AGI, and gifts of long-term holdings are capped at 30% of your AGI. Conversely, if you’re donating to a private foundation, the deduction for gifts of cash is capped at 30% of your AGI, and gifts of long-term holdings are capped at only 20% of your AGI (see Chart 1).

Charitable Income Tax Deduction Rules

Chart 1. Charitable income tax deduction rules.

*Tangible Personal Property is anything, other than land or buildings, that can be seen or touched (furniture, jewelry, books, paintings, cars, etc.)
Any contribution that can't be deducted in a current year can be carried forward five years.

Strategies for Charitable Giving

Several strategies can be employed to optimize charitable giving, each with its unique advantages and considerations.

Qualified Charitable Distributions

For individuals over the age of 70½, qualified charitable distributions offer a tax-efficient way to donate up to $105,000 to a qualified public charity directly from an Individual Retirement Account. (This amount increases to $108,000 in 2025 and is annually indexed for inflation.) QCDs count toward the required minimum distribution and are excluded from taxable income. This strategy not only reduces your taxable income but can minimize an increase to your Medicare Part B and D premiums and avoid phase-outs of other deductions.

Donor-Advised Funds

Donor-advised funds are an increasingly popular vehicle for charitable giving, especially for those looking to address a timely need. They allow donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time. This flexibility makes them an excellent option for those looking to manage their charitable giving strategically. Donor-advised funds can be funded with various types of assets, including cash, appreciated securities and even cryptocurrency.

Private Foundations

Private foundations provide a higher degree of control over charitable donations and can be an effective tool for families looking to establish a lasting philanthropic legacy. While they typically come with higher administrative costs and legal complexities, private foundations enable donors to set specific guidelines for their charitable activities and actively involve family members in the decision-making process. This strategy might be especially appropriate for donors who wish to have a hands-on approach to their philanthropy. Foundations also offer the opportunity to create a structured giving plan, fund specific initiatives and even engage in grant-making activities that align with the donor's values.

Charitable Remainder Trusts

Charitable remainder trusts are a sophisticated giving strategy that allows donors to convert appreciated assets into a lifetime income stream while receiving an immediate tax deduction. Upon the donor's death, the remaining trust assets are distributed to designated charities. This approach is particularly beneficial for individuals looking to diversify concentrated holdings or exit a family business while minimizing capital gains taxes.

A significant advantage to CRTs is their dual benefit of providing income to the donor while ultimately supporting charitable causes. This strategy can be especially effective for donors with highly appreciated assets, allowing them to make a significant philanthropic impact while also securing financial benefits.

Bunching Donations

Bunching donations involves consolidating multiple years' worth of charitable contributions into a single year to exceed the standard deduction threshold and maximize itemized deductions – a strategy especially relevant given the current elevated standard deduction levels. Bunching can be effectively combined with donor-advised funds or other charitable gifting strategies for added flexibility.

Planning and Coordination

Effective charitable giving requires careful planning and coordination with financial advisors, estate planning attorneys and tax professionals. By understanding the various options and strategies available, donors can make informed decisions that align with their values and maximize the impact of their contributions.