Be Charitable and Tax Wise

As year-end approaches, many of us are contemplating charitable contributions as a way to reduce taxes and support our favorite charities. But what kind of contribution is best?

You can just write a check, and you’ll get a tax deduction if you itemize.

But did you know that there are other ways to contribute that can give you better tax benefits? The best option for you depends on your situation and should be discussed with your financial or tax advisor. But here are some possibilities:

Donate Appreciated Securities

With the stock market so high, many of us have positions with substantial unrealized capital gains. If you sell the stock and then write a check to your favorite charity, you’ll have to pay tax on the gains unless it’s owned in a retirement account. If you instead donate a few shares of the stock to a charity, you do not have to pay capital gains tax and you still get to deduct the full current value of the donated stock from this year’s income.

Most charities, including your favorite educational institution, are happy to accept even small gifts of appreciated stock. Just ask the charity for instructions about where to send the stock, and then forward that information to your brokerage company with instructions as to how many shares you are donating. (Note: Most brokerage firms need instructions by the first week in December to complete the transaction by the end of the year.)

Donate Directly From Your IRA

You can do this if you’re over 70.5 years old, when you’re required to take RMDs (required minimum distributions) from your IRA anyway. This is called a QCD, or qualified charitable distribution.

Isn’t that the same as taking the distribution, reporting the taxes, and then donating to the charity and taking a deduction?

In short, no. It can be far more tax efficient to donate directly, primarily because a regular IRA distribution is reported “above the line” on your 1040, and thus adds to your adjusted gross income, or AGI.

A QCD prevents that distribution from being reportable as AGI, and that may benefit you in several ways:

  • You don’t have to itemize to receive the full benefit of your donation. Two-thirds of taxpayers don’t itemize but take the standard deduction instead. As a result, they get no benefit from their charitable donations. But you can get both the tax benefit of a charitable donation and take the standard deduction with a QCD.
  • Your Social Security tax may be lower. Taxation of Social Security benefits depends on AGI. Donating directly to charities from your IRA lowers your AGI.
  • Your state income and capital gains tax rates may be lower, as they are also determined by your AGI.
  • Medicare Parts B and D could be lower for some people.
  • QCDs do not count in the deductibility limit of charitable contributions (50 percent of AGI) for those who give large amounts each year.
  • QCDs do not count in the limits for itemized deductions.
  • For some people, this may affect whether medical and dental expenses are deductible.
  • For some people who qualify for certain tax credits that are limited by AGI, this may allow them to claim tax credits.

If you’d like to request a QCD and get these advantages, most IRA custodians need instructions by the end of the first week of December at the latest. Even more ideal is to plan your QCDs at the beginning of the year and put them on autopilot to your favorite charities.

Offset Taxable Windfalls or Avoid Them in the First Place

Let’s say you’re selling a highly appreciated business or concentrated stock position. Rather than realizing the gain and paying taxes on it, you could donate the appreciated asset to a CRT (Charitable Remainder Trust) before selling it. You would receive an immediate partial deduction for the value of the asset, and you’d avoid capital gains tax when the trust sells it. You—and possibly your children—could receive lifetime income from the trust, and when you die, the remainder would go to a charity of your choice.

Another option, more practical for smaller dollar amounts or income windfalls, is a Donor Advised Fund. You put a lump sum of cash or other assets into the fund, then grow it and sell it off over time to make charitable donations. These funds are extremely simple to set up and available from many financial institutions. They also provide an immediate partial tax deduction. They are simpler to administer and file taxes on, and provide greater privacy than a CRT. These are sometimes nicknamed the “private foundation for Everyman.”

Leave a Legacy

An IRA or annuity can be a good way to do this. Alas, there’s no current tax deduction for leaving money to charity later, after you die. But it can be a great way for a charity to receive far more substantial donations. Why? Because you no longer need your money after you’re gone, so you can give more then.

Why IRAs or annuities? Because when you leave money from these types of accounts to your human heirs, they have to pay income taxes on them, whereas a charity does not have to pay taxes on retirement account legacies.

Instead, leave assets from non-retirement accounts to your children or other humans. They will receive a step-up in cost basis upon your death, and thus, unless the estate is over $5.5 million ($11 million for couples), no tax is owed on inherited non-retirement assets.

Leave assets from retirement accounts and annuities to charities, since charities don’t have to pay taxes on them as human beneficiaries would.

It’s very easy to leave all or part of an IRA or annuity to a charity. You simply change the beneficiary. No taxes are paid on the portion that goes to the charity.

Note that beneficiary designations take precedence over instructions in your will. If you ever decide to change your will, make sure to check your IRA and annuity designations.


Joan Masover is a registered representative. Her firm, Investment Insights, Inc is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. 641-469-4000 Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated.   These are the opinions of Joan Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Comments and questions can be sent to