Charitable gifting basics: Timing, type, and tax

“One-size-fits-all approaches to charitable giving often fall short,” said Garrett Harbron, J.D., CFA, CFP®, head of advised wealth management strategies at Vanguard and one of the authors of the recent research paper Charitable Gifting Basics: Getting the Most From Your Giving. “Donors should evaluate their financial goals, tax situation, and philanthropic objectives to determine the most effective gifting strategy for their unique circumstances.”

Charitable gifts can take many forms, and the right choice depends on the donor’s financial situation, the type of gift the charity can accept, and the potential tax benefits. Here are some gift types and examples of gifting strategies.

Cash is the most straightforward type of gift for those with sufficient liquidity, providing immediate value to the charity and the highest potential tax deduction for the donor. The recently enacted federal tax law makes permanent the 60% adjusted gross income (AGI) limit for deducting cash gifts.¹ This means donors can continue to deduct up to 60% of their AGI for qualifying cash contributions each year, maximizing their potential tax benefit.

In-kind property gifts such as stocks, paintings, or vehicles allow donors to hold on to their cash, potentially increase the gift amount, and receive a deduction. Gifting in-kind can be more complicated than gifting cash, but the potential benefits can make it worthwhile.

• Appreciated securities are slightly more complex to donate than cash, but they offer similar flexibility and may yield greater tax benefits by avoiding capital gains tax.

• Other property such as real estate, automobiles, and art can also be donated.² Giving these gifts generally involves taking extra steps, but the benefit may be greater. Donating in kind allows the donor to avoid the transaction and administrative costs associated with selling the property.

• Qualified charitable distributions (QCDs) let individuals 70½ or older direct IRA distributions to a public charity, satisfying required minimum distributions (RMDs) without increasing taxable income.³ This can help reduce the impact of RMDs on Medicare Part B premiums and the taxation of Social Security benefits.

Choosing the right recipient

When evaluating a charity, donors should consider its legal structure, which affects tax deductions, and its level of experience, which affects how and when to give. Charities generally fall into three legal categories, with public charities typically allowing for higher deduction limits than private foundations.

• Public charities such as hospitals, universities, and donor-advised funds, receive most of their funding from public sources.

• Private foundations are typically funded by a single source and primarily support public charities through grantmaking rather than conducting charitable activities themselves.

• Private operating charities perform charitable work directly rather than making grants to public charities.

Timing a gift can depend on the charity’s needs and the donor’s cash flow. The donor’s intent—such as supporting a specific goal or offsetting income—may also influence timing.

Here are ways to time charitable giving:

• Make a series of smaller donations. This can be beneficial if the donor has concerns about future cash flow or if the charity has limited capacity to manage large gifts. In addition, the new nonitemized deduction for charitable gifts means that this approach may allow donors who take the standard deduction to receive a tax benefit from their gift.⁴

• Give a large one-time gift. This is a good strategy for donors who are comfortable with future cash flow, need an immediate deduction, or are funding an established charity.

• “Bunch” donations into a single year. To claim a tax deduction for charitable gifts, donors must itemize deductions. Higher standard deductions can limit the tax impact of smaller ongoing gifts. By bunching several years’ donations into one, individuals can maximize their tax benefit.
  • Individuals should consider this strategy in tandem with the recently enacted federal tax law, which introduces a 0.5% AGI floor on itemized deductions, meaning only the amount of the gift exceeding 0.5% of AGI is deductible.⁵ By consolidating contributions into one year, donors are more likely to surpass this threshold and maximize the tax benefit of their charitable efforts. This change makes strategic timing—such as bunching donations—more important than ever.

Timing elements involve many variables, as shown in the figure below.

“Charitable gifting starts with generosity, but strategy is important,” said Harbron. “By working with a financial advisor to best align your financial and philanthropic goals, donors can maximize the impacts of their gifts for their preferred charities and themselves.”