Charitable Giving Strategies

The American public remains generous to its favorite causes. It is estimated that over $592 billion was donated to charities in 2024, according to the Giving USA Foundation. Along with supporting their favorite charities in continuing their good work, many incorporate charitable giving into their overall income tax and estate planning strategies. This article highlights some issues you may want to consider as you plan your charitable activities. Always verify that the charities you’re considering are legitimate, and consult with your financial or tax advisor to better understand how the tax laws apply to your situation.

Income Tax Deductions

If you itemize your deductions, contributions to qualified charitable organizations can be claimed as deductions. There has been considerable discussion in many tax law changes about allowing non-itemizers to also receive tax relief from charitable contributions. However, at this time, only taxpayers who itemize their deductions can benefit from this.

The amount you can deduct for charitable contributions is generally the fair market value (FMV) of what you give. For cash contributions, it is straightforward: your deduction equals how much you donated. If you donate other property like stocks, real estate, art, or other items, determining the FMV can be more challenging. For publicly traded securities, FMV is calculated as the average of the high and low prices for that security on the date it was transferred to the charity. For illiquid or non-publicly traded securities, you might need an appraisal to determine the FMV. Additionally, the property (or securities) must have been held for more than a year.

Limits on Deductions

The tax laws do impose some limits on the total amount of charitable contributions that can be claimed on individual tax returns. Under the One Big Beautiful Bill Act (OBBBA) enacted in 2025, key limits have changed as follows:

Updated Rules for Charitable Contribution Deductions

• You must itemize deductions on Schedule A (Form 1040) to claim these (unless using the new above-the-line option for non-itemizers—up to $1,000 single / $2,000 married filing jointly for cash gifts to public charities, with inflation adjustments).
• A new 0.5% AGI floor applies for itemizers: Only charitable contributions exceeding 0.5% of your adjusted gross income (AGI) are deductible. The first 0.5% is disallowed (no carryover for that portion alone, though excess over percentage limits can carry forward).
• Cash contributions to public charities (e.g., churches, schools, hospitals, 501(c)(3) organizations like the Red Cross or United Way—not private foundations): Deductible up to 60% of AGI (this higher limit, originally from TCJA, is now permanent under OBBBA—no drop back to 50%).
• Appreciated securities (long-term capital gain property, like stocks held >1 year) donated to public charities: Deductible up to 30% of AGI (fair market value deduction, avoiding capital gains tax on appreciation).
• Carryforward: Excess deductions (beyond the percentage limits and after the 0.5% floor) can be carried forward for up to 5 years (same as before). Carryovers are subject to the same limits in future years, and the 0.5% floor doesn’t reapply to carried amounts in the same way.

Why give appreciated securities?

Donating stocks (or other capital items) that have increased in value since you acquired them offers two tax advantages. As long as you’ve held the securities for more than a year, you can claim a deduction for the appreciated amount and avoid paying tax on the capital gain. If you’ve held the stock for less than a year, your deduction is limited to your original cost basis. If you donate a stock that has decreased in value, your deduction is limited to the fair market value.

Consider the following:

You purchased 100 shares of XYZ stock several years ago at $25 per share, and the price has now increased to $60 per share. In other words, your $2,500 investment is now worth $6,000, and you want to donate $6,000 to your favorite charity.

If you donate the shares to a charity, you receive a deduction of $6,000 and do not pay income tax on the gain. If you sell the shares, you will owe tax on the $3,500 capital gain (likely 15% of $3,500, or $525), leaving you with only $5,475 to donate. By giving the shares, you avoid paying capital gains tax, and the charity receives the full $6,000 value. The charity can then sell the shares and use the proceeds.

Other Alternatives

There are more advanced trust strategies some individuals use, such as charitable remainder trusts and charitable lead trusts. With a charitable remainder trust, a donor places property—often money, securities, or real estate—into a special type of trust. During the donor’s lifetime or for a specified period, the income from that property is paid out to the donor. When the donor passes away or the period ends, the remaining assets go to the charity.

A charitable lead trust works in the opposite way. The charity receives income for the lifetime of the donor (or a designated period), and the remaining assets go to the donor’s estate or another beneficiary afterward. These trusts are complex to establish and manage, and they are typically only used as part of a sophisticated estate plan by wealthier individuals. Professional legal and tax advice is essential.

Another popular contribution vehicle in recent years is the donor advised fund. These funds have been set up by many mutual fund companies and work as follows:

• A person donates cash or appreciated securities to the “donor advised fund”. Usually, these funds require a minimum of at least $10,000. The contribution is irrevocable.
• The donor gets a tax deduction for the contribution in the year it is made.
• The fund invests and manages the contribution along with the rest of the monies within the fund.
• The donor recommends which charities are to receive the contributions.
• The “donor advised fund” evaluates the recommendation and makes the contribution.

The advantages of this approach include receiving an immediate deduction while making contributions at a later time. Additionally, the fund professionally manages the assets and handles much of the paperwork. Be sure to thoroughly research any organization offering donor-advised funds before enrolling.

Summary

Charitable contributions help many worthwhile organizations fulfill their missions. Donors can gain emotional satisfaction and tax benefits from their donations. The tax laws are designed to encourage giving, and there are ways to maximize the tax advantages of donations. Using some advanced giving strategies can be complex, so it’s always best to seek professional help when evaluating them.