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Financial management

Charitable giving: How to strategize your donations

Learn how to make the most of your charitable donations.
7 minute read
  •  
October 25, 2023
Financial management
Charitable giving
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Estate planning
Tax tips
Distributions
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Giving to charity is a profoundly personal and emotional act—it's rewarding to help individuals, communities, and causes we care about. But regarding our taxes, what's the official definition of a charitable contribution? According to the IRS, it's defined as "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."*

Over the past few years, charitable giving has been strong; in 2022, U.S. charitable donations given by individuals totaled nearly $320 billion.** 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.

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.*** 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.

1. Donate appreciated assets instead of cash

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 when you donate appreciated assets, 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 asset, 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 peace of mind about investing because of their advisor.

—Vanguard

2. Carry over your annual deduction limits for up to 5 years

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 are limited to 30% of AGI to a charitable organization.) 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 a time. A DAF is an account where you can deposit assets for donation to charity over time. This can help you receive tax deductions in your first year while continuing to invest the funds and pay them out to charities over time. A DAF can improve any charitable donation strategy, and by working with one of our knowledgeable advisors, you can see if it aligns with your personal giving goals.  

3. "Bunch" your charitable contributions

Bunching charitable contributions is the practice of making larger-than-normal charitable donations in one year in order 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. 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 are 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 personal 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®

Ready to strategize your charitable donations? Our advisors can help. Give us a call at 844-968-0818 Monday through Friday from 8 a.m. to 8 p.m., Eastern time.

4. Consider qualified charitable distributions

If you have an IRA and are over age 70½, you can make a qualified charitable distribution (QCD). While IRA distributions are normally taxable, a QCD is not subject to ordinary federal income taxes if it's paid directly to a charitable organization. You can exclude up to $100,000 of income by making a QCD if you're eligible. Couples that file joint tax returns can make QCDs of up to $200,000, as long as each individual has an IRA and is at least 70½. 

Once you turn age 73†, you're required to begin taking required minimum distributions (RMDs) from most types of tax-advantaged retirement accounts, like IRAs. QCDs count toward required minimum distributions for the year. Making QCDs can be a great strategy if you're looking to make charitable donations and don't need your full RMD. One of our financial advisors can help you figure out if this strategy makes sense for you and your situation.

5. Spread charitable giving throughout the year

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 in bulk—can help with this. It may also help you budget for a bigger gift overall. A Vanguard personal 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.

6. Name a charity as a beneficiary or leave a bequest in your will or trust

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.

Want help preserving your wealth?

Working with Vanguard gives you anytime access to advisors who are fiduciaries—always acting in your best interests. They'll provide tangible value through investment coaching to help you strategize your donations, save for retirement, and more. Come experience the peace of mind advice services may provide you. Call us at 844-968-0818 Monday through Friday from 8 a.m. to 8 p.m., Eastern time.

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*Source: Publication 526 (2022), Charitable Contributions. Internal Revenue Service. February 15, 2023.

**Source: Giving USA: Total U.S. charitable giving declined in 2022 to $499.33 billion following two years of record generosity. Lilly Family School of Philanthropy. June 20, 2023. 

***Source: 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.

Due 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.

 

All investing is subject to risk, including the possible loss of the money you invest.

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Vanguard does not provide legal or tax advice. This information is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Vanguard cannot guarantee that this information is accurate, complete, or timely. Vanguard makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend that you consult a tax or financial advisor about your individual situation.

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