Magazine

How Charitable Giving Can Benefit the World — And Your Tax Bill

By Ashley Bleckner

As a financial advisor on the Ellevest Private Wealth Management team, I spend a lot of time talking to clients about how they can invest intentionally to align their portfolios to their values. But that’s not the only way to help change the world — it’s worth being intentional with the way you donate your wealth, too.

An illustration of a pencil on top of a personal check that’s blank except for three hearts in the date field.

Giving money to charitable causes isn’t just the good thing to do — it also comes with some nice bonuses, like the fact that it can make you happier and healthier. And it can also have a ripple effect — research shows that if you give to a certain cause, your peers are more likely to do the same.

And then, of course, there are the tax benefits. Here’s what you need to know to be philanthropic and financially strategic.

How charitable giving affects your tax bill

Typically, if you itemize your taxes (as opposed to claiming the standard deduction), you can deduct qualifying charitable donations from your household’s taxable income. That lowers the amount you’d owe, up to a max of 60% of your adjusted gross income (AGI).

A “charitable contribution” (aka donation) is cash or assets (stock, property, etc) you give to an organization that meets the IRS’s qualifications — mainly, the org has to have tax-exempt status. Here’s a handy tool from the IRS to help you check to see if your donation is deductible. 

Unfortunately, donations to organizations that aren’t registered as tax exempt (like many grassroots mutual aid efforts, or crowdfunding campaigns for people in need) aren’t tax deductible. That doesn’t mean they aren’t worthy of your donations, if they align with your values! It’s just something to be aware of.

The difference between “charitable contributions” and “gifts”

They sound the same, but they’re different to the IRS — and to your tax return. Here are the key differences:

  • Your charitable contribution is typically deductible for the amount of the donation (or the fair market value of the asset).

  • Heads up, though: Donated stock is only deductible up to 30% of your AGI.

  • If you get something in return for your donation, like tickets to an event, you can only deduct the difference between the donation and the value of the thing you got. (Often this will be stated when purchasing the ticket, so keep your eyes open.)

  • If you’re donating an appreciated asset, like stock or real estate that increased in value since you got it, donating it allows you to avoid the capital gains tax that you’d have had to pay if you sold it (as long as you’ve owned the asset for at least a year) — and the organization you’re donating to won’t owe those taxes, either. That means you can donate the full value of the asset instead of a reduced, after-tax amount.

A “gift,” on the other hand, is when you give something to a person (as opposed to a qualifying organization) without expecting to get paid for its full value. (Basically, what we all think of as a gift. Like a pony.)

  • Gifts are not generally tax deductible.

  • A gift could be in the form of cash, assets, the use of an asset, or income from an asset. Also, if you sell something to them for less than it’s worth, or if you make a loan for little or no interest, that might count as a gift.

  • Your lifetime gift and estate tax limit is the amount you can give over a lifetime without the federal gift tax kicking in (as of 2022, the limit is $12.06 million, although heads up: It’s expected to drop to $5 million in 2026). But gifts don’t count toward that lifetime exclusion if they’re under the annual limit of $16,000 per recipient; a married couple can give $32,000 per year per recipient. They could also not count if you give them in certain ways for education or medical costs, or if you give them to your spouse or a political org.

Choosing a cause: How to decide where to give

There are roughly 1.8 million non-profits in the US alone, and they represent a huge range of interests — from working against violence to helping local communities combat loneliness.

We’ve got a whole article on how to create a charitable giving strategy, but here’s the Cliffs Notes: As a first step, we recommend taking some time to define your “why” — your charitable mission. Consider your values and interests, and then list out some causes that align with them — things like “stopping climate change,” “fixing gender inequality,” or “promoting global literacy.”

Then, once you’ve got the “why,” you can start looking for the “who”: organizations that reflect those values. If you don’t have a local organization or cause you care about in mind, Charity Navigator, Guidestar, and Give.org are good starting points.

If you’re planning to deduct your contribution, check here to make sure the organization qualifies with the IRS. And if you’ll be donating assets other than cash, it might be a good idea to reach out to the charity to make sure they’ll accept them.

Charitable giving strategies: How to do the giving part

Direct charitable contributions

There’s always the option of giving cash, and that’s often the simplest way to go about it. Keep good records so that you can get the max tax deduction, if you’re itemizing: Any donations over $250 require a receipt from the receiving organization.

If the organization itself accepts complex assets, like stock or property, you can donate those directly, too. Non-cash donations over $500 require you to fill out a special tax form, and if your donation’s more than $5,000, you’ll also need an appraisal of the asset. If it appraises for more than $500,000, the report will need to be handed in with your tax return.

And don’t forget, donating appreciated assets allows you to deduct their full market value and not pay capital gains taxes on the appreciation. That’s a common way to diversify out of a concentrated stock position.

Qualified charitable distributions (QCDs)

Also known as IRA charitable distributions or IRA charitable rollovers, QCDs allow people who are 70½ years or older to donate up to $100,000 a year directly from their IRA instead of taking required minimum distributions (RMDs). Because RMDs increase taxable income but QCDs don’t, this can potentially keep you in a lower tax bracket or avoid tax deduction “phaseouts.”

You can spread your QCDs across multiple charities in a given year, if you want, and you don’t have to make them all at once. If you’re married, each spouse is allowed up to $100,000 of QCDs. Also, QCDs don’t count toward that 60% of AGI donation limit, so you could potentially give even more that way.

Philanthropic investment tools

Donor-advised funds

A donor-advised fund (DAF) is a simple fund that you establish through a 501(c)(3) called the “sponsoring organization.” Once you set up the fund, you make your donation and receive an immediate tax deduction. Then you “advise” (hence the name) the sponsoring organization as to which of their investment options you want to use until the money has been donated.

A particularly great time to establish a DAF might be when something happens in your life that could make your tax bill especially high, like the opportunity to sell your company or cash in on some stock options post-IPO. By creating and funding a DAF that year, you can manage your tax bill and set that money aside for charity — without having to decide exactly where you’ll donate it just yet.

Big liquidity event or not, if you aren’t quite sure which charity you want to give to yet, a DAF is a great way to separate tax planning from donation planning. DAFs also come with low fees, require as little as $5,000 to start, and allow you to pass record-keeping responsibilities to the sponsoring organization.

Private non-profit charitable foundations

Private charitable foundations generally require more of an initial investment than DAFs (hundreds of thousands or more vs $5,000), and the stakeholders who set them up (or their designees) have to do all the administrative work, which can be time-consuming. But directors of private foundations get pretty much free range to decide what to invest the funds in and which organizations to donate to — even ones that wouldn’t normally get you a tax deduction (like non-501(c)(3)s, international organizations, and individuals).

Plus, with a private foundation, you can also make loans instead of grants if you want to provide an organization with the money it needs today but then collect it back to do good again down the line. And you can give family members compensation for helping you to run the fund — which you can’t do with a DAF.

Charitable trusts

When you put money or other assets into a trust, you give up your ownership of those things. The trustee — a fiduciary — takes ownership of the assets and then donates them to the trust’s beneficiary according to your instructions. (Btw, some private foundations are set up as charitable trusts, but not all trusts are private foundations.) Two common types of charitable trusts are charitable remainder trusts (CRTs) and charitable lead trusts (CLTs).

The nice thing about charitable trusts is that you can often give to charity and continue to collect investment income from what you’ve donated. Let’s say you donate stock. That stock’s (hopefully) going to keep paying dividends and gaining value over the long term while it’s invested.

With a CRT, you’d donate the appreciated stock to the trust, but you (or a person of your choosing) can still collect the income it generates. After a set period of time, whatever’s left in the trust is donated to the charity of your choice.

With a CLT, it’s the opposite: You donate the stock, then the investment income goes to the charity of your choice for a set period of time. And after that period of time is over, you (or the person of your choosing) get to keep what’s left.

Caveat: Trusts do take some time and money to create (you definitely need a lawyer and should plan to donate tens or hundreds of thousands in assets), and the tax implications are super complex. We definitely recommend talking to a tax pro if you think this might be right for you.

Gifting

Alternatively, maybe you want to give a gift to a family member, friend, or neighbor in need. In that case, as mentioned above, you wouldn’t receive a deduction. But as long as it’s under $16,000 ($32,000 for married couples), it won’t count toward your lifetime gift and estate tax limit. And that’s a per-recipient cap: If you want, you can give $16,000 each to your daughter, your sister, your niece, your friend, and so on and so forth.

A little planning goes a long way

Saving money on taxes isn’t the most important reason to make charitable donations — but it’s still a factor in the decision. As we approach the end of the year, take some time to think about how giving can fit with your long-term financial goals. With the deduction limit at 60% of your AGI, a little bit of planning can really help you make the most of your donations.

Click here to contact an Ellevest financial advisor in your area.


Disclosures

© 2024 Ellevest, Inc. All Rights Reserved.

Ellevest participates as an investment advisor in the Schwab Charitable program for donor-advised fund accounts that assists clients with their philanthropic goals. There is a minimum initial contribution amount for an Ellevest-managed donor-advised fund account and these accounts may not be suitable for all clients. Click here to read Schwab’s Program Policies for donor-advised funds, and click here to read Ellevest’s Form ADV.

All opinions and views expressed by Ellevest are current as of the date of this writing, are for informational purposes only, and do not constitute or imply an endorsement of any third party’s products or services.

Information was obtained from third-party sources, which we believe to be reliable but are not guaranteed for accuracy or completeness.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities, and should not be considered specific legal, investment, or tax advice.

The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person.

Investing entails risk, including the possible loss of principal, and past performance is not predictive of future results.

Ellevest, Inc. is an SEC-registered investment adviser. Ellevest fees and additional information can be found at www.ellevest.com.

Ashley Bleckner

Ashley joined Ellevest after 8 years’ experience helping high net worth clients toward their financial goals. Today, she’s a financial advisor on Ellevest’s Private Wealth Management team, working with clients to help them develop personalized long-term investment plans that align with their goals and values.