Charitable Giving Strategies

Charitable giving not only supports meaningful causes but also provides significant tax benefits when structured properly. Understanding the rules governing charitable contribution deductions is essential for CFP candidates and practitioners alike.

Types of Charitable Organizations

The IRS classifies charitable organizations into two main categories, each with different contribution limits:

Public Charities (50% Organizations)

Public charities are organizations that receive broad public support. They include:

• Churches and religious organizations
• Educational institutions (schools, colleges, universities)
• Hospitals and medical research organizations
• Publicly supported charities (Red Cross, United Way, community foundations)
• Donor-advised funds (DAFs)
• Private operating foundations

These organizations qualify for the highest AGI deduction limits.

Private Non-Operating Foundations (30%/20% Organizations)

Private non-operating foundations typically receive funding from a single source (individual, family, or corporation) and make grants to other organizations rather than directly conducting charitable activities. Examples include family foundations like the Gates Foundation.

These organizations have lower AGI deduction limits.

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AGI Limitations by Property Type and Recipient

The deductible amount of charitable contributions is limited based on three factors:

1. Type of property donated (cash vs. property)
2. Type of recipient organization (public charity vs. private foundation)
3. How the property is valued (FMV vs. basis)

Charitable Contribution Limits Summary (2025)

Key Valuation Rules

Ordinary Income Property: Always deducted at the lesser of FMV or adjusted basis. This includes:

• Inventory
• Short-term capital gain property (held 1 year or less)
• Property that would generate ordinary income if sold

Long-Term Capital Gain Property (Appreciated Assets):

• General rule: Deduct at fair market value (FMV)
• Election available: Taxpayer may elect to deduct at basis to use the higher 50% limit instead of 30%
• Private foundations: Must use basis (no FMV election available)

Tangible Personal Property - Related vs. Unrelated Use:

• Related use: The charity will use the property for its exempt purpose (e.g., donating artwork to a museum for display) - deduct at FMV
• Unrelated use: The charity will sell or use the property for non-exempt purposes (e.g., donating artwork to a hospital that will sell it) - deduct at basis only

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5-Year Carryforward Rule

Charitable contributions that exceed the AGI limits in a given year are not lost. Excess contributions can be carried forward for up to 5 years.

Carryforward Rules:

• Current year contributions are deducted first
• Carryforward contributions are deducted in order (oldest first)
• The same AGI limitations apply in carryforward years
• Unused carryforwards expire after 5 years

Example: Evelyn has $150,000 AGI and donates $100,000 cash to the Red Cross (a public charity). Her deduction is limited to $90,000 (60% x $150,000). The remaining $10,000 carries forward to the next tax year.

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Donor-Advised Funds (DAFs)

A donor-advised fund (DAF) is a charitable giving vehicle administered by a public charity that allows donors to:

1. Make an irrevocable contribution and receive an immediate tax deduction
2. Recommend grants to qualified charities over time
3. Potentially grow the funds tax-free through investment

DAF Benefits

• Immediate deduction: Full deduction in the year of contribution (subject to AGI limits)
• Flexibility: No deadline to recommend grants to charities
• Simplicity: One contribution, multiple grants; simplified record-keeping
• Privacy: Grants can be made anonymously
• Bunching strategy: Ideal for "bunching" multiple years of contributions into one year to exceed the standard deduction

Bunching Strategy Example

Jenna typically donates $7,000 annually, and her total itemized deductions (including charitable gifts) are $11,000. Since the standard deduction ($15,750 for single filers in 2025) exceeds her itemized deductions, she receives no tax benefit from her charitable contributions.

Solution: Jenna contributes $21,000 to a DAF in 2025, increasing her itemized deductions to $25,000. She claims $25,000 in itemized deductions for 2025, then takes the standard deduction in 2026 and 2027 while making grants from the DAF to her favorite charities.

DAF Contribution Limits

DAFs are public charities, so they qualify for the higher AGI limits:

• Cash: 60% of AGI
• Appreciated securities: 30% of AGI at FMV

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Charitable Remainder Trusts (CRTs)

A charitable remainder trust (CRT) is a split-interest trust that provides:

1. Income stream to the donor (or other beneficiaries) for life or a term of years
2. Remainder interest passes to one or more charities

The donor receives an immediate income tax deduction for the present value of the remainder interest.

Two Types of CRTs

CRT Requirements

• Annual payment must be at least 5% and no more than 50% of initial FMV
• Present value of remainder interest must be at least 10% of initial FMV
• Trust term: Life of beneficiary(ies) or fixed term up to 20 years

Calculating the Charitable Deduction

The deduction equals the present value of the remainder interest, calculated using:

• Initial fair market value of contributed assets
• Annual payment rate
• Donor's age (or term of years)
• IRS Section 7520 rate (published monthly)

Note: Older donors receive larger deductions because the charity's remainder interest has a higher present value (shorter payout period). Younger donors receive smaller deductions.

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Charitable Lead Trusts (CLTs)

A charitable lead trust (CLT) is the opposite of a CRT:

1. Charity receives income for a specified period
2. Remainder passes to family members (or returns to the donor)

Two Types of CLTs

CLT Tax Treatment

• Grantor CLT: Donor receives income tax deduction upfront; pays tax on trust income annually
• Non-grantor CLT: No income tax deduction; trust pays tax on income; reduced gift/estate tax on remainder

CLTs are often used for wealth transfer to the next generation with reduced gift and estate taxes.

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Qualified Charitable Distributions (QCDs)

A Qualified Charitable Distribution (QCD) allows IRA owners age 70 1/2 or older to transfer funds directly from their IRA to a qualified charity.

2025 QCD Limits

QCD Rules

• Donor must be age 70 1/2 or older (not 73, despite RMD age increase)
• Must be a direct transfer from IRA to charity (cannot receive distribution first)
• QCD satisfies Required Minimum Distribution (RMD) if one is due
• No charitable deduction (but amount is excluded from gross income)
• Eligible accounts: Traditional IRA, Roth IRA, inactive SEP/SIMPLE IRA
• Not eligible: 401(k), 403(b), active SEP/SIMPLE

QCD Benefits

• Reduces AGI: Unlike a regular distribution + charitable deduction, a QCD is excluded from income entirely
• Helps non-itemizers: Provides tax benefit without itemizing
• Reduces AGI-based phaseouts: Lower AGI may improve eligibility for other tax benefits
• Reduces Medicare premiums: Lower MAGI may reduce IRMAA surcharges

2025 Reporting Requirement

Beginning in 2025, IRA custodians must report QCDs on Form 1099-R using Code Y in Box 7.

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Charitable Gift Annuities

A charitable gift annuity (CGA) is a contract between a donor and a charity where:

1. Donor makes an irrevocable gift to charity
2. Charity agrees to pay donor (and possibly another beneficiary) a fixed annuity for life

Key Features

• Part of each payment is tax-free return of principal
• Donor receives immediate charitable deduction for the gift portion
• Rates are typically set by the American Council on Gift Annuities
• Under SECURE 2.0, donors can fund a CGA with a one-time QCD up to $54,000 (2025)

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Private Foundation Rules

Private foundations face additional rules and limitations:

5% Minimum Distribution Requirement

Private non-operating foundations must distribute at least 5% of net investment assets annually for charitable purposes. This includes:

• Grants to public charities
• Charitable program expenses
• Reasonable administrative costs related to charitable activities

Other Private Foundation Rules

• Subject to 2% excise tax on net investment income (reduced to 1.39% if distributions exceed historical average)
• Prohibited from self-dealing with substantial contributors
• Cannot hold more than 20% of a corporation's stock (combined with disqualified persons)
• Subject to additional disclosure requirements

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Tax Planning Strategies

Strategy 1: Donate Appreciated Stock

Donating appreciated long-term capital gain stock to a public charity allows the donor to:

• Deduct the full fair market value
• Avoid capital gains tax on the appreciation
• Deduction limited to 30% of AGI (or elect 50% at basis)

Strategy 2: Bunch Contributions with DAF

Use a donor-advised fund to bunch multiple years of charitable giving into a single year to exceed the standard deduction threshold.

Strategy 3: QCD for IRA Distributions

For taxpayers over 70 1/2 who don't need their RMD for living expenses, using QCDs reduces taxable income more effectively than taking a distribution and claiming a charitable deduction.

Strategy 4: CRT for Concentrated Stock

A charitable remainder trust can help diversify a concentrated stock position while:

• Deferring capital gains tax
• Providing lifetime income
• Generating a charitable deduction