The Complete Guide to Planned and Charitable Giving

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Many people recognize the importance of financial planning for their budgeting and investments, but it is also important to think purposefully about charitable giving in order to maximize its good effects. Although giving is its own reward, giving wisely increases the blessing.

At Marotta Wealth Management, we help our clients through the rewarding process of charitable giving. Our clients receive advice on investment selection and timing to maximize giving and minimize taxes. We also provide the administrative support necessary to oversee the entire gifting process.

When beginning your planned giving, the first step is determining why and where you are giving the gift. The options of places to give are nearly infinite. Here are a few major categories:


501(c)(3) Charity

There are millions of officially registered charities in the United States. It is important to note that charities that have been designated a 501(c)(3) organization in the United States have not really been vetted by anyone. There are scams that have the 501(c)(3) designation. For this reason, do research on your charity before giving and be sure you are the one to reach out to them.

Although charities don’t pay taxes, if they are big enough they file an IRS Form 990 as an informational return. For the curious donor, the form can provide a benchmark for comparing the relative health of charities. On it, you’ll find information about how much of your donated dollars go to overhead versus program services. The form also includes information on revenue streams, general expenses, and wages paid to key employees, plus a list of board members. While charities are required to provide you with a copy of their 990 upon request, the fastest way to locate a free copy is to go online. GuideStar.org and FoundationCenter.org both provide free access to 990s as well as search tools to find other charities in your state or city.

There is also Charity Navigator which provides ratings for charities based on their financial health. Lastly, the Better Business Bureau Wise Giving Alliance measures public charities against its 20 standards for charity accountability.

Giving to Get State Tax Credits

In 2018, the IRS ruled that state tax credits count as “receiving a benefit” when it comes to charitable gifts. And, as the IRS has previously stated, “If you receive a benefit from the contribution such as merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can only deduct the amount that exceeds the fair market value of the benefit received.”

That being said, if you take the standard deduction and are charitably inclined, you might benefit from acquiring state tax credits for your gift. In Virginia, programs such as the Neighborhood Assistance Program (NAP) or Education Improvement Scholarships enable you to give to local charities while receiving state tax credits.

Even though these gifts may not be fully tax deductible on your federal return (see “State Tax Credits Are Becoming Less Valuable“), because you take the standard deduction whether they are deducted on the federal return does not make a difference. At the state level though, your charitable giving can then supplement or pay for your state tax bill, saving you money.

Getting state tax credits can be combined with some of the strategies listed below such as giving from a Qualified Charitable Distributions (QCDs) or using appreciated stock, but you cannot receive state tax credits if you give out of a Donor Advised Fund.

Microfinance Loans

Microfinance provides banking services to the poor who would normally not qualify. For the world’s poor who survive on less than $2 per day, banking services are unavailable. Without access to a safe place to store savings, the poor cannot get a loan to start a business. This is where the Kiva website provides the online bridge between the savings of donors in the developed world and the needy entrepreneurs in the developing world. And it also puts checks and balances on the process.

Creating an account at Kiva is free and then you can help participate in funding these microloans via crowdfunding in increments of $25 or more. Once the borrower repays the loan, you can then use the repayments to fund new loans, donate, or withdraw the money.

Loans made through kiva are not charitable giving and thus not tax deductible. If you want, you can instead donate to Kiva’s operating expenses, which is tax deductible because they are a 501(c)(3) charity.

Family, Friends, or Individuals

Many give money to their children, elderly parents, friends, or even acquaintances who are in need. For individuals with lower incomes than you, there is an opportunity to give them appreciated stock to shift the capital gains to a lower tax bracket. If they have an income, there is also an opportunity to help them fund their Roth IRA. With a bit of planning, you can make the practical gift very personal.

While helping a family or friend is noble, money can complicate the relationship. Sometimes gifts are free. Other times, pay back is expected. Out of love, family members are often willing to lend to other family members quickly with little to no interest or formality on their loans. However, there may be hidden expectations from both parties, and these unspoken expectations can cause relational strife.

For this reason, be honest about the terms of the money that is changing hands. If you are making a gift where you expect nothing in return, make that clear. If you are making a loan, write a contract.

It may seem cold to write and sign a contract, but contracts exist to protect both parties. A good contract does not need to be complicated, especially between family members or friends, but it does need to clearly state what assets are changing hands and when repayment will take place.

When considering how you give, note that if you give appreciated stock to a family or friend, your friend will inherit your cost basis if it shows a gain. If the asset shows a loss (the basis is higher than the current value), then your recipient will receive the current value as the cost basis. For this reason, it is wise to give assets with capital gains to recipients who are in lower capital gains tax brackets. Meanwhile, for losses, it is generally better to sell the asset, harvest the loss for your own taxes, and then gift the proceeds.


After you have decided where you are giving, the next step is to decide what you should give. Again, there are many options. Here are a few of the most commonly beneficial ones.

Cash

Cash is the simplest way to give but the hardest way to track. If you are giving to a 501(c)(3) charity and you want to report your gift on your taxes, then you should be sure to get a receipt from the charity even though you are giving cash.

Giving cash has little tax benefit. In fact, we tend to use it as the baseline to which we compare the value of all other methods of giving.

Qualified Charitable Distribution (QCD) from your Required Minimum Distribution (RMD)

In December 2015, Congress passed a law allowing you to give up to $100,000 to charity directly from your individual retirement account (IRA) when you are over 70 1/2 years old without counting the distribution as taxable income. This type of charitable gift is called a Qualified Charitable Distribution (QCD).

Normally, when you take money out of your IRA it is a taxable event. The withdrawal adds to your taxable income and inflates your adjusted gross income (AGI). Then, if you give the same amount to charity, the charitable gift reduces your taxable income by the amount of the gift but it does not reduce your AGI.

Meanwhile, because a QCD is excluded from taxable income in the first place, it has no effect on your AGI. This is important because phase-outs, Roth contribution eligibility, the Net Investment Income and Additional Medicare surtaxes, Medicare premium costs, and the amount of taxable Social Security income all factor off your AGI in some way.

Furthermore, giving a QCD directly from your IRA can allow you to benefit from charitable giving even if you don’t normally itemize your deductions. Giving directly from your IRA allows you to ignore your QCD IRA distribution when calculating your taxable income and also take the standard deduction.

Normally, charitable giving can only be deducted if it is less than 50% of your AGI. Giving directly from your IRA allows you to effectively reduce your AGI even if the gift amount would otherwise be greater than 50% of your AGI.

QCDs are allowed from any IRA other than a SEP or SIMPLE IRA, which means you can make a QCD from your Inherited Traditional IRA’s RMD, but no one younger than 70½ can make a Qualified Charitable Distribution. You must be at least 70½ at the time of the distribution to have it count as a QCD, so you will need to wait until 6 months after your 70th birthday to make the distribution.

There are a few groups of people who might benefit from QCDs.

Qualified charitable distributions are particularly beneficial to charitably-inclined families whose IRA distributions would push them into the 15% federal capital gains bracket or over a Medicare IRMAA surcharge line. By making a QCD instead, they are able to exclude the charitable IRA distribution from taxable income and benefit from 0% federal capital gains tax or lower Medicare premiums instead.

QCDs are also beneficial for people with most of their net worth in Traditional IRAs, retirees who do not need all of their money, and the charitably-inclined who do not itemize.

That being said, most charitably-inclined investors who already itemize can experience more tax savings by making donations from appreciated stock in their taxable accounts than by QCD donations. Such stock donations experience double tax savings. Not only does the gift count as a deduction, reducing taxable income, but also the donation avoids paying the state and federal capital gains tax you would have owed had you sold the stock.

It is important to note though that you cannot give a QCD to a donor advised fund; it must go directly to the charity.

Gifting Appreciated Stock Directly

No matter what worthy organizations or individuals you support, you can give up to 15% more if you give them appreciated stock instead of cash. If you sell $1,000 worth of appreciated stock you may have to pay the capital gains tax of 15%. If most of the stock’s value is appreciation, the amount of the tax approaches $150, leaving only $850 for charitable giving. State taxes may reduce the amount even more.

If, however, you give the stock directly to the recipient, you can take the full $1,000 tax deduction, and the recipient, if they are a charity or in the 0% gains rate, will not have to pay any federal taxes when they sell the stock. In this way, you could save up to $150 on capital gains taxes while the gift itself reduces your taxes at your marginal rate. In total, your $1,000 gift could cost you as little as $500 if you use appreciated stock.

Gifting Appreciated Stock to a Donor Advised Fund

A Donor Advised Fund, according to the IRS, is “a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.”

Creating a Donor Advised Fund and then giving your appreciated stock to it has several additional benefits over other methods of giving.

Normally the process of transferring appreciated stock is tedious and time consuming. You have to contact the charity and ask if they have a stock liquidation account. You need to get the charity’s account number and Depository Trust Company (DTC) number. You need to send instructions to your custodian and then value the stock transferred by using an average of the market high and the low on the day of transfer.

Using a donor advised fund is much easier.

You still need to pick the stocks that you are giving, but they smoothly transfer from your investment account into your charitable account. The custodian then properly values the holdings for you and sends you a tax receipt for your gift.

From the Donor Advised Fund, you as the donor then get to direct money onward to a charity or to charities via a grant process. (Here is how you do the grant process with a Schwab Charitable Donor Advised Fund.) And designating charitable gifts in your donor advised account can be done online at any time of day or night.

Furthermore, the process is easier for the charity. Once you have instructed a transfer, the money is sent to the charity as a simple check. All they need to do is cash it.

Schwab Charitable keeps a permanent record of every grant you designated and how much was given to each organization. Keeping a record of your cumulative giving allows you to see the impact of your generosity over time and focus your giving to the organizations which you believe are doing the most good.

But there are a few circumstances when you may want or need to do charitable giving directly to the charity. Here are several reasons a gift might need to be given without using a donor advised fund.

At Schwab Charitable, the initial contribution must be $5,000 and additional contributions must be at least $500 in value. You can transfer enough stock to cover grants for several years but there is an annualized administrative fee of 0.60% of assets or a minimum of $100. This makes the account ideal for families whose charitable giving exceeds $2,000 a year.

If your capital gains are taxed at a 0% federal tax rate, the benefit of giving appreciated stock is smaller. You may still pay state tax rates on appreciated stock, but the benefit from avoiding federal taxes is zero. The smaller tax savings may not as easily justify paying the $100 fee unless your annual giving exceeds $3,500.

Finally, gifts to receive state tax credits require that your donation come directly from you and cannot flow through a donor advised fund.

That being said, most of our charitably-inclined clients would benefit from using a donor advised fund even if they need to occasionally give directly in order to receive tax credits. We highly recommend such a fund for generous investors.

Gift Clumping to a Donor Advised Fund

If you would not normally benefit from itemizing your deductions and are younger than 70 1/2 and thus cannot give a QCD, then you may benefit from a giving strategy called gift clumping.

Imagine a married couple that gives $20,000 away to charity each year. Their normal itemized deductions are $10,000 state and local taxes plus $20,000 charitable deduction for a total itemized deduction of $30,000.

If they did gift clumping, they would give $40,000 away to their Donor Advised Fund every other year. This means that in their years of giving, their itemized deductions are $50,000 ($10,000 + $40,000) and in the years without giving, they take the standard deduction of $24,000.

So if you look at both years, they have total deductions of $74,000 with gift clumping ($24,000 + $50,000) vs. only $60,000 without gift clumping ($30,000 + $30,000).

Meanwhile, because they are giving to a Donor Advised Fund, they can designate their actual donations each year of only $20,000 to their favorite charity or charities, timing those donations whenever they want.

Testamentary Giving

There is a tax benefit to leaving some assets to your favorite charity rather than leaving it to your heirs. Generally speaking, assets such as Roth accounts are best left to family members because there is no tax burden and they will experience tax free growth as they take small required minimum distributions. If you were to leave a traditional IRA to a family member the withdrawals would be taxable to them. But leaving a traditional IRA to a qualified charity means that the charity will receive the money from your retirement account tax-free. Many default to using the IRA beneficiary designation form to specify who will receive the asset after your death, but a smarter strategy is to set up a Donor Advised Fund as a Testamentary Fund.

Testamentary Donor Advised Funds are not funded right away, instead they are funded upon your death. You can either designate specific charities with percentages as the beneficiaries of the fund or you can designate particular representatives as having the authority to pick where the assets go. The only rule is that the assets must go to charity.

You can, for example, designate that your Testamentary Donor Advised Fund give 50% to one charity and then 25% each to two additional charities. If during your lifetime you change your mind, changing the beneficiaries of your Donor Advised Fund is easier than changing your estate documents.

Alternately you could pick your children as the designated representatives. If you have a son and a daughter, you could say that the son is authorized to designate 50% of the account and the daughter the other 50%. In this way, you empower your children to be charitable with part of your estate.


Planned giving can be a rewarding part of your financial plan. Taking these few extra steps can maximize its benefit to both you and the recipient.

Photo by Viktor Forgacs on Unsplash

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Megan Russell has worked with Marotta Wealth Management since 2005. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine