Charitable Giving

The basic deduction

Cash contributions to qualified 501(c)(3) public charities are deductible up to 60% of AGI if you itemize. Contributions of appreciated assets are deductible up to 30% of AGI. Excess contributions can carry forward 5 years.

In 2026 with the standard deduction at $32,200 MFJ, most households don't itemize, so they receive no tax benefit from charitable giving. Bunching strategies (below) can help.

Giving appreciated stock

One of the best-known tax moves: instead of giving cash to a charity, give long-term appreciated stock.

Example: You own stock bought for $10,000, now worth $50,000. You want to give $50,000 to charity.

Option A — Sell and give cash:

• Sell stock. Pay capital gains tax: ($50k − $10k) × 15% = $6,000.
• Give $50k to charity. Deduct $50k on your tax return.

Option B — Give stock directly:

• Give the stock to charity. No capital gains tax.
• Charity sells stock tax-free (it's a 501(c)(3)).
• You deduct the full $50k fair market value.

Option B saves you $6,000 with no downside. The charity ends up with the same $50k either way.

This strategy is limited to long-term appreciated property (held > 1 year) given to qualified public charities. Short-term property is deductible only at basis. Private foundations have slightly different rules.

Donor-advised funds (DAFs)

A donor-advised fund is an account with a sponsoring charity (Fidelity Charitable, Schwab Charitable, Vanguard Charitable, community foundations). You contribute to the DAF, take an immediate tax deduction, and then recommend grants to specific charities over time.

Advantages:

• Immediate tax deduction in the contribution year.
• Flexibility to distribute over time (useful for bunching).
• Can accept appreciated stock, cryptocurrency, and complex assets.
• Simplifies record-keeping (one big donation, many small distributions).
• Gets money out of your estate.

Disadvantages:

• Some fees (typically 0.6–1% annually).
• Less direct connection to recipient charities.
• "Advisory" — technically the DAF sponsor isn't legally required to follow your recommendation, though they almost always do.

DAFs have become a major channel for charitable giving — over $50 billion contributed annually.

Bunching

If your itemized deductions approach but don't exceed the standard deduction, your charitable giving provides no tax benefit. Bunching concentrates contributions in alternating years:

• Year 1 (normal year): take standard deduction, skip itemizing.
• Year 2 (bunching year): make 2 years' worth of charitable contributions to a DAF; itemize that year, claiming the full deduction.
• Year 3 (normal year): take standard deduction, distribute from DAF to actual charities.

Instead of $10k/year in charitable giving with no tax benefit for 3 years, you get $20k of deduction in Year 2 and $10k of standard deduction in Years 1 and 3.

Qualified Charitable Distributions (QCDs)

For retirees age 70½+, QCDs let you distribute from an IRA directly to qualified charities, up to $108,000 per year (2026, indexed).

Tax treatment:

• The distribution doesn't appear on your tax return as income.
• Not deductible (since you never recognized it as income).
• Counts toward your RMD.

Why QCDs are valuable:

• Keeps AGI lower, which helps with Social Security taxation, IRMAA Medicare premiums, ACA subsidies.
• Effectively gets the "charitable deduction" even if you take the standard deduction.
• Direct, simple mechanism.

For retirees with charitable intent who otherwise can't itemize, QCDs are often the most tax-efficient giving channel.

Charitable bequests (at death)

Gifts to charity at death are deductible against the taxable estate — unlimited, with no AGI cap. For estates above the federal exemption ($15M), charitable bequests can eliminate estate tax entirely.

Common vehicles:

• Outright bequest in will or trust. Simplest.
• Beneficiary designation on IRA. Charity receives pre-tax IRA balance; no income or estate tax since charity is tax-exempt. Particularly efficient compared to naming individual beneficiaries who face ordinary income tax on distributions.
• Charitable remainder trust (CRT). Provides income to individual beneficiaries first, then charity receives remainder. Partial deduction at funding.
• Charitable lead trust (CLT). Reverse of CRT — charity receives income for a term, then remainder to individuals. Can transfer appreciation to heirs at reduced gift tax cost.

Charitable gift annuities

You contribute assets to a charity; the charity pays you a fixed annuity for life, then keeps the remainder at your death. Part of each payment is tax-free return of principal; part is taxable.

Rates are typically lower than commercial annuities (since part of the contribution is gift), but the charitable element and partial tax deduction create value for the right donor.

Private foundations

Wealthy families sometimes form private foundations — donor-controlled 501(c)(3) organizations that make grants to other charities. Advantages:

• Full donor control over mission and grants.
• Legacy and naming.
• Employment for family members (within limits).

Disadvantages:

• Extensive administrative requirements.
• Lower deduction limits (30% of AGI for cash, 20% for appreciated property).
• 5% annual minimum distribution requirement.
• Excise taxes and disqualified-person rules.

Typically warrants $2M+ commitment to justify the setup and ongoing costs. Below that, a DAF usually accomplishes the same goals more efficiently.

How Horizons uses this

Horizons models charitable contributions as expenses that also reduce AGI (when itemized). QCDs appear as IRA distributions that don't add to taxable income. Charitable bequests in the estate model reduce the taxable estate. The long-run effect of a consistent annual giving strategy shows up in both reduced current taxes and reduced estate at death.