Senior Financial Advisor
What is charitable giving?
Giving to charity is a profoundly personal and emotional act—it's rewarding to help individuals, communities, and causes we care about. But when it comes to taxes, what's the official definition of a charitable contribution? According to the IRS, it's "a donation or gift to, or for the use of, a qualified organization. It is voluntary and is made without getting, or expecting to get, anything of equal value."1
Over the past few years, charitable giving has been strong; in 2023, U.S. charitable donations given by individuals totaled nearly $558 billion.2 The generosity of Vanguard investors and people all over the world continually inspires me, and I'm honored to support and guide my clients toward their philanthropic goals. But one mistake I see clients make is that they sometimes fall short of their charitable goals because they don't plan their giving in advance.
Why do charitable donations need a strategy?
Just like saving for any long-term goal, charitable donations need a strategy, and Vanguard's a trusted partner when it comes to financial strategy. In fact, 3 times as many investors report having peace of mind about investing because of their advisor.3 So let's help you build a formal plan and update it each year. It can help you meet your charitable goals while maximizing available tax savings.
Here are 6 long-term strategies I often share with my clients to help them make the most of their charitable giving.
It's easy to donate cash. But by giving appreciated securities, you can give more money to your charities and less to taxes. This is because you won't have to pay capital gains taxes and your charities don't have to pay taxes when they sell them.
For example, if you wanted to give $10,000, you could give it as a cash gift. But if you have a stock fund whose value has increased by $10,000, consider donating the fund instead. You won't owe capital gains tax on the security, you'll still receive a charitable deduction, and you'll meet your giving goals—possibly having paid less out of pocket.
3x as many investors report having strong peace of mind when working with a human advisor when compared to going it alone.
—Vanguard
Generally, you can't deduct more than 60% of your adjusted gross income (AGI) for the year for your cash donations. Contributions of appreciated securities to a charitable organization are limited to 30% of your AGI. But if you want to give more, you can carry forward charitable giving above annual deduction limits for up to 5 years.
A donor-advised fund (DAF) is another great tool if you're making multiple donations at once. With a DAF, you can set aside money for charity by making deposits into the account and claiming a deduction in the first tax year. You can then invest the money and pay it out to charities over time. A DAF can improve any charitable donation strategy, and by working with one of our advisors, you can see if it aligns with your personal giving goals.
Bunching charitable contributions is the practice of making larger-than-normal charitable donations in one year to maximize the tax benefits. This can be done if you're on the fence between taking the standard deduction or itemizing your deductions on your tax return. If you itemize deductions, you can deduct charitable contributions up to a certain amount based on your adjusted gross income (AGI) and the type of donation (cash vs. appreciated securities). By bunching your charitable contributions in one year, you can increase your itemized deductions and lower your taxable income.
For example, let's say you normally donate $1,000 to charity each year. If you itemize deductions, you can deduct this amount from your taxable income. However, if you bunch your charitable contributions and donate $2,000 in one year, you can deduct that amount from your taxable income. Depending on the amount of your donation, this could save you hundreds or even thousands of dollars in taxes.
Of course, there are some things to keep in mind when bunching charitable contributions. First, you need to make sure you have the money to make the larger donation. Second, you need to make sure the charity you're donating to is a qualified organization. Finally, you need to get a written acknowledgment from the charity for each donation. If you're considering bunching charitable contributions, you should talk to a financial advisor to see if it's the right strategy for you.
When I'm helping my clients build their giving strategy, I recommend they 'bunch' their contributions into one year if it yields a higher tax benefit.
—Taylor Turner, CFP®
When you reach age 73, you'll have to start taking required minimum distributions (RMDs) each year from your retirement accounts.4
If you're not itemizing your deductions and you've reached RMD age, you may want to consider donating your RMD to a qualified charity through a qualified charitable distribution (QCD).5 It'll satisfy your RMD, and—as of 2024—up to $105,000 annually won't count as taxable income. Our financial advisors have the experience and expertise to help you figure out if this approach can provide value for you.
While most charities receive the bulk of their donations during the year-end "Season of Giving," many organizations need funds year-round. Giving consistently throughout the year—rather than giving a larger onetime donation—can help with this. It may also help you budget for a bigger gift overall. A Vanguard financial advisor can help you automate your gifting by setting up an automatic withdrawal plan for your QCDs to run monthly, quarterly, or whenever works best for you. It's one of the many benefits of investing with Vanguard. Our advisors are here to plan and prepare with you, providing financial strategies customized to your specific goals, needs, and situation.
Thinking about what may happen after you're gone isn't anyone's favorite topic. However, I often encourage my clients to consider building charitable bequests into their estate plans if they're worried about giving too much too early.
Look at this as an opportunity to create a legacy of giving. Naming a charity as a beneficiary or leaving a bequest in your will or trust allows you to give to causes meaningful to you without overextending yourself if you need to spend more on long-term care or other expenses. Additionally, charitable bequests are eligible for estate tax deduction and can reduce estate taxes.
Wondering what organizations to give to? Vanguard Charitable has tools to help you narrow your search.
Vanguard advisors provide tangible value through investment coaching to help you strategize your donations, save for retirement, and more. Call us at 844-968-0818 Monday through Friday from 8 a.m. to 8 p.m., Eastern time.
1Source: Publication 526 (2023), Charitable Contributions. Internal Revenue Service. February 29, 2024.
2Source: Giving USA: U.S. charitable giving totaled $557.16 billion in 2023. Lilly Family School of Philanthropy. June 25, 2024.
3Source: Vanguard, Quantifying the investor's view on the value of human and robo-advice. (Paulo Costa, Ph.D., and Jane E. Henshaw, 2022). Advised investors were asked about their level of peace of mind with the advisor as well as how much peace of mind they imagined having on their own. They could rate peace of mind from 0 ("No peace of mind at all") to 10 ("A great deal of peace of mind") and were considered to have peace of mind if their rating was between 8 and 10. 24% reported having peace of mind when investing on their own, and 80% reported having peace of mind when investing with an advisor.
4Due to changes to federal law that took effect on January 1, 2023, the age at which you must begin taking RMDs differs depending on when you were born. If you reached age 72 on or before December 31, 2022, you were already required to take your RMD and must continue satisfying that requirement. However, if you had not yet reached age 72 by December 31, 2022, you must take your first RMD from your traditional IRA by April 1 of the year after you reached age 73.
5Beginning in 2023, a QCD may be taken to fund a Charitable Remainder UniTrust, Charitable Remainder Annuity Trust, or Charitable Gift Annuity up to a maximum onetime amount of $53,000.
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This information is intended to be educational and is not tailored to the investment needs of any specific investor.
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