Tax Efficient Giving

In this article I am going to discuss some ways to give in a way that will allow you to save money on your income tax. Not everyone can take advantage of all of these.  And some people will be able to combine two or more to take a greater advantage. Before I begin, allow me to make the same disclaimer as everyone else – “consult your own tax advisor before implementing any of these”.

The first method is one that is available to those over the age of 70 ½ .  It is called a Qualified Charitable Distribution(or QCD).  It is money withdrawn from a Traditional IRA that is donated to charity.  The amount of this withdrawal donated is not taxed. It does not matter whether you itemize deductions or not.  Plus the amount of this donation will count toward your required minimum distribution. 

There are a few important points.  The donation must go directly from the trustee of your IRA to a charity eligible to receive tax deductible contributions (Grace is). You must have an acknowledgment of your contribution from the charity (your giving statement from Grace).

Your QCD is limited to $100,000 per person per year. We can only hope this is a problem:-).  These details are explained in IRS publication 590-B Distributions from IRAs.  

Those who invest in the stock market outside of an IRA or 401(k) have another option.  They can donate stock.  If you have held stock over a year and have a sizable gain, this strategy can save money on income tax.  When the stock is sold, income tax must be paid on the gain.  And sometimes this gain is large.  But if the stock is donated directly to charity, the gain is not taxed.  Plus, the value given can be claimed as an itemized deduction (which may or not be an added bonus, depending on whether it exceeds the standard deduction).  It is important to donate the stock directly to the charity.  Do NOT sell the stock and then give the money to the charity.  For donations to Grace, talk to your treasurer.  

If you have a large position (large value of this investment), you can give a portion of the shares in each of several years. Or, you can donate the whole position using the bunching strategy discussed next.  Or donate the whole position to a Donor Advised Fund – the last strategy discussed.

This next one has been used by some taxpayers for several decades.  It is known as bunching of itemized deductions. It is used for deductions where the taxpayer has control over the timing of paying deductible items.  Charity donations certainly fall into this category. The taxpayer will give twice the amount of their annual donation to the charity in one year.  Let’s call this “year one”.  The following year – “year two”, they give nothing.  By doing this their deductions in year one might exceed the standard deduction amount. This lowers their income tax in year one.  If they had given equally in year one and year two, they would have no deduction.  

If they really want to beef up their deductions in year one, they can give three or four times their normal donation in year one and nothing for years two, three, and four.  You may feel uncomfortable doing this.  You may be afraid those preparing the budget expect year one to be repeated every year.  You may let someone on the Stewardship committee know you are doing this. Or you can use this strategy in association with a Donor Advised Fund – discussed next.

Donor Advised Fund(or DAF) sounds like something complicated.  Think of it this way.  Instead of giving directly to the charity of your choice, you put the money in an account at a financial institution.  This account is also called a “Fund”.  You are the “Donor” to this Fund.  Later you “Advise” the financial institution to send a check to your charity from this Fund.  You are the DONOR who ADVISED the FUND manager what charity to send a check to. When you put money into this fund, it is considered a charitable donation at that time.  You take the itemized deduction in the year you give to the DAF.  Later, when the fund sends a check to your advised charity, you do not take any deduction (because you did earlier).  OK, so what is the point?

The DAF works well for bunching multiple years of donations into one year.  Put four years’ worth of donations to Grace into the DAF.  Each year have the DAF send a check to Grace for that years’ amount. Actually, you can set up the DAF to make automatic payments to Grace monthly.  That way you get the large deduction on your taxes in year one.  And Grace gets your donation evenly for the next four years.

Use the donated stock strategy to donate to the DAF.  This works well to donate a large gain in one year, and give to Grace evenly.  Donating stock to your DAF works well for all those small donations you make too – $100 to charity one, $300 to charity two, etc. You would not have given stock for these small amounts.  But the DAF writes a check to the small charities from stock you have donated.

While the money sits in the DAF waiting to be donated to your charity, you have choices how it is invested.  You can keep it in simple savings, invest in aggressive stocks, or somewhere in the middle.  You can list a beneficiary (or more than one).  If you die before the money in the account is used, the amount will be given to said beneficiary.

More information is available on the web sites listed below.  Not every financial institution provides a DAF.  I’m not indorsing any particular institution.  But three popular ones are:

Charles Schwab



If you would like to know more, please call me. Do leave a voicemail since I don’t answer numbers I don’t recognize.  For all I know it might be someone asking me to donate to their charity 🙂 Dave Oberlander 651-730-2077