How to Be Charitable While Playing by Today’s Tax Rules

The changes of the Tax Cuts and Jobs Act of 2017 really affected how we can donate to charity while saving on taxes. Of course, tax savings should not be your only consideration: It’s never been a one-to-one write-off, but always an individual commitment. 

Once the standard deduction was increased to $12,550 for individuals and $25,100 for couples (2021), donations were no longer quite as incentivized, because your charitable deduction + state and local taxes (limited to $10,000) + mortgage interest deduction (also limited) + any other allowable itemized deductions must exceed the standard deduction. If you’re one of those who are better off taking the standard deduction, you can still deduct $300 per person ($600 for joint filers) as long as the deduction is for a cash contribution — no mutual funds, bags of clothes or car.

​There’s no question that the law made it harder and less financially desirable for small and moderate donors. But there are still some ways you can work the system for your, and the charity’s, benefit.

Bunching Strategy

Let’s say you’re just on the edge. Maybe your property taxes are $10,000 and you’ve paid off the house. You’d need to donate more than $2,550 to itemize as a single person. Whoa, that’s more than you usually give away? What if you viewed the taxes as a two-year plan? You make your customary donation in January (let’s say $1,500) and another $1,500 donation in December of the same year, enabling you to itemize (total deductions $13,000). The other year, you take the standard deduction (and perhaps donate just the $300). How significant the biennial donation needs to be depends on your other deductions and how much is needed to raise you above the standard deduction. Note also that this will be much higher for a couple filing jointly.

Donate Appreciated Funds

Rather than selling appreciated mutual funds and paying capital gains taxes on them, you can gift them directly to a charity. This primarily applies to investments you hold in a taxable account. The donation is considered to be the full value of the securities. Even if you don’t donate enough to allow you to deduct the donation, you will still avoid paying capital gains taxes on the appreciation. If your donation is large enough to allow you to itemize, you can take the full value as long as you held them long-term. If you are donating funds that only qualify for short-term treatment, you’ll only be able to deduct what you paid for them. This donation is only deductible up to 30% of your adjusted gross income (AGI), but excess amounts can be carried forward for five years.

​Most of the major mutual fund companies have information and forms online to do this easily.

Open a Donor-Advised Fund

Establishing a donor-advised fund takes “bunching” one step further. You establish a donor-advised fund at an investment company (Vanguard, Fidelity, Schwab, T. Rowe Price, etc.), where you donate at least their minimum sum
(for example, $25,000 at Vanguard). Others offer lower or no minimum, but may have high minimum fees.

​The money gives you an immediate tax deduction for the full amount, but you can pay out the money to charities over time. Meanwhile, the money is invested in a portfolio which may increase over time — enabling a charity possibly to receive more. 

​Investment companies are quite happy to help you with this. You’ll likely be investing it in one of their recommended portfolios and you’ll be charged management and investment fees as well. You should have a good understanding of exactly what those will be, particularly if the money grows. The suggested portfolios usually resemble the same type of mix you’d see in a target-date retirement fund or 529 plan. While it’s possible to invest in individual securities, the investment com­pany will probably make you add an investment adviser and the fees will likely be much higher.

​Who should consider a donor-advised fund? Obviously, this is not for those of us who send $50 to a small number of charities. Cash donations are only deductible up to 60% of adjusted gross income, with the 30% limit applying to securities donated directly. At first glance, it appears a donor-advised fund would only appeal to people with high incomes. 

​But there are other situations that might make this appealing — when you get a large income infusion in one year. Some deferred executive payout must be withdrawn at retirement and results in a fully taxable sum that also can dramatically increase your income in that year. You might want to settle some of that in a donor-advised fund, with the deduction in one year, but comprising your charitable distributions, well, for a long time. Or maybe you’ve inherited a stock portfolio, left it alone for quite a while and now have significant capital gains. You can move some of those investments (up to 30% of AGI) at full current value to a donor-advised fund, while taking a deduction. Finally, maybe you’ve invented something, or get royalties or sold an artistic product. A one-time taxable lump sum might make it advantageous to generate a deduction, as well.

​Once donated, the donation is irrevocable.

​Donor-advised funds can work well for someone facing a big income increase and tax hit in one year, who has a desire to make ongoing donations to charity and would like to see the money grow in order to make bigger donations in the future.

Donate Some of Your Required Minimum Distributions

The Tax Cuts and Jobs Act did leave one possibility for tax savings open to anyone over 70½ or with required minimum distributions (now, at or after 72). Some retirees find themselves in the fortunate situation of not needing all their RMDs, or regularly donating to charity out of their retirement income, even if the donation isn’t tax-deductible. 

​If you use any part of your RMD as a donation to a charity, it will not be counted as taxable income to you. You won’t get a deduction either, but doing so may tamp down your tax bracket. This is partic­ularly desirable if the RMD increases your taxable income to a level that would also increase your monthly Medicare premium. No excess taxable income, no increase.

​The check must be for cash and written directly to the charity. You can’t have it sent to you (or transferred to a taxable account), then send a check to a charity. There are several ways: The investment house sends the payment; gives you a check made out to the charity; or, if you can write a check on your individual retirement account, it can be made out to the charity. Note that this qualified charitable deduction (QCD) can only be made from a traditional IRA account; QCDs from 401(k)s, 403(b)s and Roth IRAs (where there would be no benefit) aren’t permitted. If you inherited an IRA, you can also make the donation from your RMD from that account, as long as you are over 70½ years old. You cannot contribute the QCD to a donor-advised fund; it must go directly to a charity.

Donate to Purchase a Charitable Annuity

Like other types of annuities, charitable annuities are essentially buying yourself a pension. You can donate cash or appreciated investments (including stocks, collectibles, artwork and non-income real estate). You’ll get the full value of any appreciated investments, plus a deduction provided it exceeds the standard deduction, subject to the AGI limitations above. The annuity will then send you regular income payments, part of which are treated as return of principle (not taxed), and part earnings (taxable). Upon the death of the beneficiary, the charity keeps the remainder.

​Charitable annuities may or may not pay as much as an insurance annuity. Also, they may only be available from relatively large charities (universities, nonprofit professional groups, etc.) If you are depending on lifetime income as well as the charitable donation, you should consider how stable the charity is and whether it will last as long as you will.

Prudent Management of Donations

Too often we make small donations to any organization that asks. It may be a better investment of your charitable donations, however, to focus larger amounts on a few organizations: It costs them less in administrative fees. Although convenient, charities generally have to pay processing fees if you donate via credit card. Checks or auto-transfers get more of your dollars working.

​GoFundMe donations are generally considered personal gifts and are not tax-deductible. In addition, GoFundMe, which is a profit-making company, charges 2.9% plus a 30-cent fee on every donation. If you donate $100, the person actually will receive $96.80. Consider sending your gift directly to the person in need.

​When focusing my own donations, I’ve thought about what issues I really care about, then finding the best charities in those areas. I reviewed ratings on GuideStar and Charity Navigator, two organizations that drill deeply into the operations and financials of charities.

​Just as you review the manager’s expertise and expenses for mutual funds, take a look at a charity’s spending. On one hand, charities must pay a decent salary to attract competentmanagement (nobody works for free), and some money must be spent to run the organization.

​ On the other hand, neither of these should be exorbitant. Just as with investments, I’ve put my faith in a few that turned out not to be so good, but then I just move along to the next. There are always plenty of needy and worthwhile causes. Be sure you know what a charity is actually doing. I’ve found it worthwhile to follow them on social media. It makes it more personal and satisfying if you can attach real people and projects to your contributions.

​Even if you no longer have as much tax incentive to give generously, the needs addressed by charities haven’t disappeared. Consider giving thoughtfully to causes working for changes and improvements in the world that you would like to support.

Websites of Interest

This article was originally published in the August 2021 issue of BetterInvesting Magazine.

Danielle L. Schultz, CFP, CDFA, is a fee-only financial adviser with Haven Financial Solutions, Inc., based in Evanston, Illinois. She can be reached at

Securities mentioned are illustrations or for study and presented for educational purposes only. They are not to be considered as endorsed or recommended for purchase by NAIC/BetterInvesting. Investors should conduct their own review and analysis of any company of interest using the  Stock Selection Guide before making an investment decision. Securities discussed may be held by the writer in her personal portfolio or those of their clients.  

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