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Smart(est) Ways to Make Charitable Gifts

Smart(est) Ways to Make Charitable Gifts

April 21, 2023

There are many ways to give to charity. You can donate cash, donate appreciated assets, or volunteer your time. But savvy givers often use two other charitable tools that can offer significant tax benefits.

  1. If you're under 70½ years old, consider a donor-advised fund (DAF). A DAF is a charitable giving account that allows you to make tax-deductible contributions and then distribute the funds to qualified charities over time.
  2. After 70½ years old, a qualified charitable distribution (QCD) from your IRA can be the most advantageous. A QCD is a tax-free distribution from your IRA that can be made directly to a qualified charity.

Here's a closer look at both options:

Donor Advised Funds (DAFs)

  • What is a DAF? A DAF is a charitable giving account that allows you to make tax-deductible contributions and then distribute the funds to qualified charities over time.
  • What are the benefits of a DAF? DAFs offer several benefits, including:
    • Tax-deductible: Contributions to a DAF are tax-deductible in the tax year of the contribution.  Bunching several years of charitable gifts into one year's contribution can result in a higher tax deduction than the sum of charitable deductions over several years. 
    • Flexibility: You can choose when and to which charities you want to distribute the funds from your DAF. This gives you more flexibility than other charitable giving options, such as donating appreciated assets.
    • Convenience: DAFs are easy to set up and use. You can open a DAF with a variety of different financial institutions.
  • What are the limitations of a DAF? There are a few limitations to be aware of, including:
    • Most DAFs have a minimum contribution requirement. This amount varies from DAF to DAF.
    • The IRS limits the tax deduction for DAF contributions to 60% of adjusted gross income (AGI) for cash contributions and 30% of AGI for appreciated securities.  Tax deductions in excess of these amounts can be carried forward to future tax years.
  • Download our DAF flowchart to see if this is right for you.


Qualified Charitable Distributions (QCDs)

  • What is a QCD? A QCD is a tax-free distribution from your IRA made directly to a qualified charity. To qualify, you must be at least 70½ years old and the distribution must be made in cash.
  • What are the benefits of a QCD? QCDs offer several benefits, including:
    • Tax-free: QCDs are not included in your adjusted gross income and therefore not part of your taxable income - even if you claim the standard deduction. This can be a significant benefit, especially if you're in a high tax bracket.
    • Reduces required minimum distributions (RMDs): QCD reduces the size of your IRA which in turn reduces your future RMDs. This can help reduce future taxes.  Once your RMDs start, the QCD counts toward that year's RMD which reduces that year's taxes too.
    • Easy to set up: QCDs are easy to set up with your IRA custodian.  In some cases, your custodian can provide a checkbook linked to your IRA.  Checks you write to charity from your IRA can count as QCDs.  Just be sure the charity cashes the check by Dec. 31st each year.
  • What are the limitations of a QCD? There are a few limitations to be aware of, including:
    • The QCD must be made in cash, not shares.
    • The QCD must be made to a qualified charity: You can find a list of qualified charities on the IRS website.
    • The QCD must be made by the deadline: The deadline for making a QCD for the current year is December 31st.
  • Download our QCD flowchartto see if this is right for you.


Need more guidance?

If you're not sure how these might benefit your situation, contact us.  Our tax planning and charitable giving expertise can guide you to the right solution for you.

P.S.  Remember to support your Wisconsin Medical Society Foundation with your charitable gifts!