Why Tax Planning and Charitable Giving Should Be Best Friends
Look, I know what you’re thinking. Taxes and charitable giving? That sounds about as exciting as watching paint dry while filing your 1040. But stick with me here, because this stuff actually matters if you care about two things: supporting causes you believe in and not overpaying Uncle Sam.
I recently sat down with Sean Mullaney, better known as the FI Tax Guy, to talk about how to make your charitable giving work harder for you and the organizations you support. Sean’s a CPA, fee-only fiduciary planner, and co-author of “Tax Planning to and Through Early Retirement.” He’s also been quoted in the Wall Street Journal and New York Times, so the guy knows his stuff.
And before you click away thinking “I’m not rich enough for this to matter,” hold up. Some of these strategies work for regular folks like you and me who just want to give back without getting wrecked come tax time.
Understanding Charitable Giving Tax Benefits
Here’s the deal. When you give to qualified charitable organizations, the IRS actually rewards you for it. But like most things in the tax code, there’s a right way and a wrong way to do it.
The traditional route is pretty straightforward. You donate money, you get a receipt, and if you itemize deductions on your tax return, you can deduct that donation. Simple enough, right?
But there’s a catch. With the current standard deduction sitting at $14,600 for single filers and $29,200 for married couples filing jointly in 2024, most people don’t itemize anymore. That means a lot of folks are giving to charity without getting any tax benefit at all.
Is that a problem? Not necessarily. You should give because you want to support a cause, not just for the tax break. But if there are legal ways to make your giving more tax-efficient, why wouldn’t you take advantage of them?
Qualified Charitable Distributions (QCDs)
This is where things get interesting, especially if you’re over 70 and a half or planning to get there eventually.
A Qualified Charitable Distribution, or QCD, lets you donate money directly from your IRA to a qualified charity. And here’s the kicker, that money never shows up as taxable income. It’s like it never existed for tax purposes.
Why does this matter? Once you hit age 73 (or 75 if you were born in 1960 or later), you have to start taking Required Minimum Distributions from your traditional retirement accounts. The IRS forces you to pull money out and pay taxes on it whether you need it or not.
But with a QCD, you can satisfy up to $108,000 of your RMD (that’s the 2025 limit, indexed for inflation) by sending it straight to a charity. You don’t pay taxes on it, the charity gets the full amount, and your RMD is satisfied. Win-win-win.
Sean put it perfectly when he said, “If you’re charitably inclined and you’ve got traditional retirement accounts, the QCD is just a no-brainer in terms of tax benefit.” I couldn’t agree more.
How QCDs Actually Work
Let’s break this down with a real example. Say you’re 75 years old and your RMD for the year is $40,000. You normally give about $10,000 to charity each year anyway.
Option 1 (The Old Way): Take the full $40,000 RMD, pay taxes on it at your marginal rate (let’s say 22%), then write checks to your favorite charities totaling $10,000.
Option 2 (The Smart Way): Direct $10,000 from your IRA straight to charity as a QCD. Now you only have to take $30,000 as a regular distribution and pay taxes on that. You just saved $2,200 in federal taxes, plus whatever your state tax is.
The beauty of this strategy is that it works whether you itemize or not. And unlike regular charitable deductions, QCDs aren’t subject to the adjusted gross income limitations that can cap your charitable deductions.
Donor-Advised Funds is The Giving Account You Didn’t Know You Needed
Now let’s talk about something that sounds fancy but is actually pretty straightforward, donor-advised funds, or DAFs.
Think of a DAF like a charitable savings account. You contribute money (or stock, or other assets) to the fund, you get an immediate tax deduction, and then you can recommend grants to charities over time. The money grows tax-free in the meantime.
Why would you do this instead of just writing checks directly to charities? A few reasons:
Bunching Your Donations
Remember how I mentioned the standard deduction being so high that most people can’t itemize? Here’s a workaround.
Let’s say you normally give $10,000 a year to charity. If you’re married, that’s nowhere near the $29,200 standard deduction, so you get zero tax benefit from your giving.
But what if you put three years’ worth of donations ($30,000) into a DAF in one year? Now you’re over the standard deduction threshold. You itemize that year, get a big tax break, and then you can distribute the money to charities over the next three years at your leisure.
Sean explained it as “instead of giving $10,000 a year in cash, you just put 30,000 in your donor-advised fund. You get the deduction now and you can spread out the grants.” It’s a way of timing your deductions to actually benefit you while still supporting the same causes on the same schedule.
Appreciated Stock is The Secret Weapon
Here’s something most people don’t realize. If you have stock that’s gone up in value, you can donate it to a DAF (or directly to a charity) and get a deduction for the full fair market value without ever paying capital gains tax on the appreciation.
Let me say that again. You buy stock for $1,000. It grows to $10,000. You donate it to your DAF. You get a $10,000 tax deduction, and you never pay taxes on that $9,000 gain. The charity gets the full value, and you save on both income taxes and capital gains taxes.
As Sean pointed out, “if you’ve got an individual equity that has really appreciated, it’s a great live-off asset first in early retirement, but two, in terms of charitable giving, it’s a fantastic asset.”
This works especially well if you work for a company where you’ve accumulated stock through an employee stock purchase plan or restricted stock units. I did this myself when I retired. I had a bunch of company stock that had appreciated significantly, and donating it is way more tax-efficient than selling it and donating cash.
The 2025-2026 Changes You Need to Know
There’s a new development starting in 2025 that’s worth paying attention to. The SECURE 2.0 Act created something called a “charitable legacy IRA.”
Here’s how it works. Starting in 2025, if you’re over 70 and a half, you can make a one-time $54,000 QCD to certain charitable entities like charitable remainder trusts or charitable gift annuities. This is in addition to the regular $108,000 annual QCD limit for 2025.
Why would you do this? It allows you to set up more sophisticated charitable giving structures while still getting the QCD tax benefits. Sean mentioned that “it’s a little more complicated than the plain vanilla, just give it straight from your IRA to the charity,” but for folks with larger estates or specific charitable goals, it opens up some interesting possibilities.
There’s also a new provision starting in 2026 called the “universal charitable deduction.” Even if you don’t itemize, you’ll be able to deduct up to $1,000 ($2,000 for married couples) in cash charitable contributions. It’s not huge, but it’s a meaningful benefit for folks who take the standard deduction and could never get a tax break for their giving before.
The Non-Cash Donation Puzzle
Let’s talk about something that confuses almost everyone, donating stuff instead of cash.
You know how every few months you clean out your closets, throw a bunch of clothes and household items in boxes, and haul them to Goodwill? That’s deductible too, if you itemize.
The problem is figuring out what it’s worth. Goodwill and other charities have valuation guides on their websites. A pair of jeans might be worth $6, a suit might be $25, that kind of thing. You’re supposed to estimate the fair market value of the items in good condition.
Sean’s advice here was pretty practical: “Keep as good a records as you can and make the best approximation. Don’t be overly aggressive on claiming a deduction.”
Honestly? Unless you’re donating some really valuable stuff, the tax benefit probably isn’t worth obsessing over. The real value is getting the clutter out of your house. But hey, if you’re itemizing anyway, save the receipt and claim something reasonable.
For bigger non-cash donations like cars or appreciated stock, you’ll need to fill out Form 8283 with your tax return. For appreciated stock, the rules are pretty clear. You use the average of the high and low stock price on the day the charity receives it.
Building Your Charitable Giving Strategy
So how do you actually put this into practice? Here’s what I took away from my conversation with Sean.
If You’re Still Working: Focus on building up those traditional retirement accounts like 401(k)s and traditional IRAs. Why? Because those are the accounts that will give you the best charitable giving options later through QCDs.
If you have company stock that’s appreciated significantly, that’s your charitable giving secret weapon. Donate the shares directly instead of selling them and donating cash.
If you’re charitably inclined and have variable income, consider using a DAF to bunch your deductions in high-income years.
If You’re Approaching Retirement: Start thinking about your RMD strategy. If you’re going to be charitably inclined in your 70s and beyond, make sure you have money in traditional retirement accounts to take advantage of QCDs.
Consider front-loading charitable giving before you start taking Social Security or RMDs if you have appreciated assets you want to donate anyway.
If You’re Already Retired: Once you hit 70 and a half, QCDs should be your go-to charitable giving tool if you have traditional retirement account balances.
If you’re under 70 and a half but already retired, appreciated stock donations and DAFs still make sense, especially in years when you might be doing Roth conversions or have other taxable events.
Purpose and Planning
Here’s the thing that Sean really drove home in our conversation. All of these strategies are tools, not goals in themselves.
He put it this way: “We wrote a niche book for everyone. If you’re going to have some tax inefficiencies, and that’s what they boil down to, inefficiencies, not disasters, inefficiencies, if you’re going to have tax inefficiencies in retirement, it almost certainly coincides with wild financial success.”
In other words, if your biggest problem is having too much money in retirement accounts and facing big tax bills, that’s actually a pretty good problem to have. Yes, we should minimize those taxes where we can. But don’t let the tax tail wag the dog.
Give to causes you care about. Give because it matters to you. Give because you want to make a difference in the world. The tax benefits are just icing on the cake, a way to make your giving more efficient so more money ends up in the hands of the organizations doing good work.
Sean’s new book, “Tax Planning to and Through Early Retirement,” co-authored with Cody Garrett, dives deep into all of these strategies and more. If you’re serious about optimizing your finances for early retirement or just regular retirement, it’s worth checking out. The book breaks down complex tax topics into understandable strategies with real examples, and most importantly, it takes the fear out of retirement tax planning.
Your Next Steps
You don’t have to implement everything at once. Here’s what I’d suggest:
Start by understanding your current situation. Are you itemizing or taking the standard deduction? If you’re not itemizing, traditional cash donations aren’t doing anything for you tax-wise.
If you’re over 70 and a half and taking RMDs, talk to your IRA custodian about setting up QCDs. It’s usually a simple process, and the tax savings are immediate.
If you have appreciated stock, seriously consider donating it instead of cash. The tax benefits are significant, and it’s not as complicated as it sounds.
And if you’re charitably inclined but your donations don’t add up to enough to itemize, look into a DAF to bunch several years of giving into one year.
Most importantly, remember that these are tools to help you give more effectively. The goal isn’t to game the system. The goal is to support causes you care about in a way that makes sense financially.
Because at the end of the day, the best financial plan is one that aligns with your values and helps you live the life you want to live. And for a lot of us, that includes giving back and making a difference in the world.
Want to learn more about tax-efficient giving? Check out Sean Mullaney’s blog at fitaxguy.com or pick up his book “Tax Planning to and Through Early Retirement” on Amazon. And remember, always consult with a qualified tax professional about your specific situation before making major financial decisions.
The discussion is intended to be for general educational purposes and is not tax, legal, or investment advice for any individual. Chris and The Extreme Personal Finance Show do not endorse Sean Mullaney, Mullaney Financial & Tax, Inc. and their services.
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