Cash vs. Appreciated Securities
Cash donations to qualifying 501(c)(3) organisations are tax-deductible for itemizing taxpayers — but cash is almost never the most tax-efficient way to give. Donating appreciated securities — stocks, mutual fund shares, or ETFs held more than one year — is significantly more powerful. The donor deducts the full fair market value of the securities, just as with cash. But unlike selling first and donating the proceeds, a direct donation of securities completely avoids the capital gains tax on the embedded appreciation. At a 15% capital gains rate, a donor who gives stock worth $10,000 with a $2,000 basis saves $1,200 in capital gains tax compared to selling first. The charity receives the same amount regardless.
Donor-Advised Funds
Photo by Alehandra on Unsplash
A Donor-Advised Fund (DAF) is a charitable account established at a sponsoring organisation (Fidelity Charitable, Schwab Charitable, Vanguard Charitable, or community foundations). The donor contributes assets — cash, securities, or other property — takes an immediate tax deduction, and then recommends grants to specific charities over time. DAFs are particularly useful for bunching: concentrating multiple years of charitable intent into a single large contribution in a year when itemizing is advantageous, then distributing grants to preferred charities at any pace. Once contributed, the funds belong to the sponsoring organisation (the donor retains advisory rights, not legal control) and must ultimately be distributed to qualifying charities. DAFs have grown explosively — Fidelity Charitable has become the largest US charitable organisation by donations received.
Qualified Charitable Distributions
Photo by Sweet Life on Unsplash
Taxpayers aged 70½ or older can make Qualified Charitable Distributions (QCDs) directly from an IRA to a qualifying charity, up to $105,000 per year in 2024 (indexed for inflation). A QCD satisfies the Required Minimum Distribution for the year without the distribution appearing as taxable income on the donor's return. This is a significant advantage over the alternative — taking the RMD as income, then donating cash — because the QCD works even for taxpayers who take the standard deduction. A $10,000 QCD made directly from an IRA produces no taxable income and no deduction, which is often better than $10,000 of taxable RMD income offset by a $10,000 charitable deduction (which may not help if the taxpayer takes the standard deduction).
Charitable Remainder Trusts and Beyond
Photo by Gabrielle Henderson on Unsplash
For very large charitable gifts, more complex vehicles are available. A Charitable Remainder Trust (CRT) allows a donor to transfer highly appreciated assets into a trust, receive an income stream for a period of years or for life, take a partial charitable deduction upfront, and ultimately pass the remaining assets to charity. The trust can sell the appreciated assets without the donor immediately recognising capital gains, spreading the tax impact. A Charitable Lead Annuity Trust (CLAT) works in reverse — the charity receives income for a period, then the assets pass to heirs at reduced estate tax cost. These techniques are appropriate for donors with very large appreciated positions, significant charitable intent, and the resources to set up and administer a trust. For most donors, the combination of appreciated securities and a DAF accomplishes the same goals more simply.