The Money Meets Medicine Podcast

4 Ways to Save Taxes While Giving to Charity

By Jimmy Turner, MD
Host of Money Meets Medicine

Charitable giving not only supports causes close to your heart, but it has been shown to increase your overall happiness as well. Even cooler? Charitable giving also offers some pretty sweet tax benefits. I’m talking about keeping more of your hard-earned money while fulfilling your philanthropic efforts. Win-win, right?

But with so many options out there, it can be tough to know where to start. Tag along as we discuss the benefits of charitable giving and, by the end, some tax tricks to maximize your tax deductions including utilizing a Donor Advised Fund, Qualified Charitable Contributions, trusts, and more.

Table of Contents:

The Psychological and Social Benefits of Charitable Giving

When we think about charitable giving, our minds often jump to the tangible impact it has on the recipients. But what about the giver? As it turns out, there’s a whole host of psychological and social benefits that come with being generous. I guess this is why it is said, “It is better to give than to receive.”

Studies have shown that giving to others can actually increase our own happiness and sense of fulfillment. It’s a win-win situation – the charity benefits from your donation, you get a tax break, and you get a boost of feel-good hormones in return.

Boosting Happiness Through Generosity

Have you ever noticed how great you feel after doing something kind for someone else? That’s because our brains are wired to reward us for prosocial behavior. When we give to charity, our bodies release endorphins, serotonin, and oxytocin – all those happy chemicals that make us feel warm and fuzzy inside.

But it’s not just a temporary high. A 2008 study found that people who gave money to others or to charity experienced greater happiness than those who spent it on themselves. And the more they gave, the happier they felt.

“Giving to others activates an area of the brain associated with pleasure, social connection, and trust.” – Harvard Health

It’s a positive feedback loop – the more we give, the better we feel, and the more likely we are to keep giving.

The Role of Religious Convictions in Charitable Giving

For many people, charitable giving is deeply rooted in their religious beliefs. Across faiths, there’s a common thread of compassion, generosity, and caring for those in need.

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In Christianity, tithing (giving 10% of your income) is seen as a way to honor God and support the church’s mission. Islam has the practice of Zakat, which requires Muslims to donate a portion of their wealth to those less fortunate. Judaism emphasizes the importance of tzedakah, or righteous giving.

But it’s not just about fulfilling a religious obligation. For people of faith, charitable giving is a way to put their beliefs into action and make a positive difference in the world. It’s a tangible expression of their values and convictions.

“Charity is a supreme virtue, and the great channel through which the mercy of God is passed on to mankind.” – Conrad Hilton

Of course, you don’t have to be religious to be charitable. But for those who are, their faith often serves as a powerful motivator and guiding force in their giving.

So whether you’re driven by personal values, religious convictions, or simply the desire to make a difference, there’s no denying the psychological and social rewards of charitable giving. It’s a beautiful way to spread more light and love in the world – and reap the benefits yourself in the process.

Maximizing Tax Benefits Through Strategic Charitable Contributions

Now that we know the benefits of charitable giving from a psychological and religious perspective, let’s talk about one additional benefit – saving money on taxes. As a W-2 employee, you might feel like your options for reducing your tax burden are limited. For many, there are really only 3 big buckets for deductions: the State and Local Tax (SALT, which is capped at $10,000), mortgage interest, and charitable giving.

By making strategic charitable contributions, you can not only support the causes you care about but also optimize your tax deductions. It’s a win-win situation. And there are a couple of hacks to making the most of these deductions.

Understanding Donor-Advised Funds

One tax-efficient way to give is through a donor-advised fund (DAF). Think of it like a charitable investment account. You contribute cash, securities, or other assets to the fund, and then you make donations from your DAF to the charity of your choice.

The beauty of a DAF is that you get an immediate tax deduction for your contribution on the year in which you provide the gift to the DAF, even if the funds aren’t distributed to charities right away. This allows you to “front-load” your giving and maximize your deductions in a given tax year in the same way you can front-load a 529 while saving for your kid’s college education.

But the benefits don’t stop there. When you contribute appreciated assets (like stocks or real estate) to a DAF, you avoid paying capital gains taxes on those assets. This is why it is beneficial to donate appreciated gains from your brokerage account into a DAF. Plus, the funds in your DAF can be invested for potential tax-free growth, meaning you can provide even more money for the causes you support.

“Donor-advised funds are the fastest-growing charitable giving vehicle in the United States because they are one of the easiest and most tax-advantageous ways to give to charity.” – National Philanthropic Trust

Gains to the DAF & Losses to Tax-Loss Harvesting

By combining a DAF with other investment strategies through a direct indexing strategy, you may be able to supercharge your tax efficiency and make an even bigger impact with your giving.

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For those who are not familiar with direct indexing, this strategy involves using a custodian to produce a composite of stocks that reflect commonly used index funds. However, instead of owning an individual index fund, you are the owner of all of the individual components of that fund. With this ownership, there is increased flexibility in how you use your investments for tax efficiency purposes.

For example, some investors opt to perform a direct indexing strategy so that they can pick the individual winners who have gained the most and they contribute those appreciated shares to their DAF. This allows them to put the largest gains into their DAF.

On the other side, the losers are tax-loss harvested. This allows for an annual tax-deduction of $3,000 against ordinary income. Even better, you can use these losses when you reach retirement and really start tapping into your brokerage account. Using the losses you have carried forward, these losses can be used to offset your capital gains and reduce your taxes as well.

The Strategy of Bunching Donations

Donating appreciated shares are not the only way you can use a DAF to reduce your tax burden. Another smart way to maximize your tax benefits is through “bunching” your donations. This means concentrating your giving into alternate years, rather than spreading it out evenly year after year.

Why would you do this? It all comes down to the standard deduction. If your total itemized deductions (including charitable contributions) don’t exceed the standard deduction threshold, you won’t get any additional tax benefit from your giving. Say, for example, a married couple has a $10,000 SALT deduction, they have paid off their house, and they donate $20,000. If they itemize their deductions, this would amount to a total of $30,000 in tax deductions.

Well, the standard deduction in 2024 for married couples is $29,200. Because their itemized deductions only amount to $30,000 when combined, they are receiving very little tax benefits for their charitable giving. Over a 4 year period they could reduce their taxes by ~$120,000. Not an insignificant number, but they can do better.

An Example of Alternating Donations

By bunching your donations into a single year, you can push your itemized deductions over that threshold and reap the tax rewards. Then, in the “off” years, you can take the standard deduction and still support your favorite charities through your DAF.

“Bunching charitable contributions is a tax-savvy strategy that can help you exceed the standard deduction and maximize your tax savings.” – Kiplinger

Using the same scenario above, what would happen if this married couple decided to double their donations in years 1 and 3 and took the standard deduction in years 2 and 4.

  • Year 1: $10,000 SALT + $40,000 in charitable giving into a DAF = $50,000 in deductions
  • Year 2: Standard Deduction = $29,200 (while giving $20,000 from Year 1 DAF contribution)
  • Year 3: $10,000 SALT + $40,000 in charitable giving into DAF = $50,000 in deductions
  • Year 4: Standard Deduction = $29,200 (while giving $20,000 from Year 3 DAF contribution)

In this scenario, they are no longer deducting ~$120,000 from their taxes.

Instead, they are now deducting a total of $158,400 from their taxes.  This is ~$40,000 in additional tax savings. If their tax rate was 30%, they would take home around $12,000 more over that four year period while still giving the same amount to charitable efforts.

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Of course, every person’s financial situation is unique, so it’s important to consult with a tax professional or financial advisor to determine the best giving strategy for you. But by thinking strategically about your charitable contributions, you can make a bigger impact on the world and on your own bottom line.

Innovative Giving Strategies Beyond the DAF

A DAF is not the only creative way to donate to charity.

If you’re 72 or older, you can make qualified charitable distributions (QCDs) directly from your IRA to charity. This can be a great way to satisfy your required minimum distribution (RMD) without increasing your taxable income. An RMD is the amount the IRS requires you to take from any pre-tax retirement accounts. Why? Uncle Sam wants to make sure you pay them eventually.

Normally, when you take a distribution from your IRA, it counts as taxable income. If you are required to withdraw more money than you plan to use, this amount to additional taxes you may not want to owe. But with a QCD, you can donate up to $100,000 per year directly to charity, and it counts towards your RMD without showing up on your tax return.

“QCDs are a powerful giving tool for retirees. They allow you to support your favorite charities while avoiding the tax hit of an IRA distribution.” – Fidelity Charitable

This can be especially beneficial if you don’t itemize deductions, since you won’t get any tax benefit from charitable contributions otherwise. But even if you do itemize, a QCD can help keep your taxable income (and thus, your tax bill) lower.

The Benefits of Charitable Remainder Trusts

For those with significant assets, a charitable remainder trust (CRT) can be another powerful way to support charity while also generating income and tax benefits for yourself.

Here’s how it works: You contribute appreciated assets (like stocks or real estate) to an irrevocable trust. The trust then sells the assets tax-free and invests the proceeds. You receive an income stream from the trust for a set period of time (either a fixed number of years or your lifetime). When the term is up, the remaining assets go to the charity(ies) of your choice.

By donating appreciated assets to a CRT, you can avoid capital gains taxes on the sale, receive a partial charitable deduction, and generate income for yourself or your beneficiaries. Plus, the assets are removed from your estate for tax purposes.

“Charitable remainder trusts offer a way to convert appreciated assets into lifetime income, avoid capital gains taxes, and benefit charity. They can be a powerful tool for those in high tax brackets.” – Kiplinger

Of course, CRTs are complex vehicles that require careful planning and professional guidance. But for the right person, they can be a creative way to do well by doing good.

Conclusion

The bottom line? Charitable giving doesn’t have to be boring or limited to cash. By exploring some of these innovative strategies, you can maximize your impact, minimize your taxes, and build a philanthropic legacy that lasts.

Giving to charity is a beautiful thing, but doing it in a tax efficient way? That’s better. By leveraging strategies like donor-advised funds, appreciated securities, alternating giving, and charitable remainder trusts, you can amplify your impact while keeping more money in your pocket. It’s like having your cake and eating it too, except the cake is a giant tax deduction.

But more than just the financial perks, charitable giving has the power to transform lives – both the recipients’ and your own. There’s something incredibly fulfilling about knowing you’re making a difference in the world, one donation at a time. So go ahead, embrace your inner philanthropist, and give with a heart full of generosity and a mind full of tax efficiency. Your favorite charities (and your accountant) will thank you.

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