The Smartest Way to Donate to Charity and Pay Less in Taxes (Most People Get This Wrong)
- Kirk Reagan
- Feb 11
- 2 min read
Updated: Feb 12
Most people who give to charity focus on the size of the gift. Very few think about the method.
That is a mistake.
How you donate often matters more than how much you donate, especially once taxes enter the picture.
Over the years, I have seen people unknowingly give away tens of thousands of dollars to the IRS simply because they defaulted to writing checks or making online donations. The good news is that there are better options, and most of them are surprisingly simple.
Let’s walk through the smartest ways to give.
Cash Donations: Familiar but Often Inefficient
Cash donations are the most common method. This includes cash, checks, and online gifts.
While easy, cash is usually the least tax efficient option. Even with recent changes allowing limited above the line deductions, cash gifts are subject to floors, caps, and income limits. Once those limits are hit, the tax benefit fades quickly.
Cash should almost always be the last option, not the first.
Donating Highly Appreciated Assets
This is one of the most underused strategies available.
Instead of selling appreciated stock and donating the cash, donate the shares directly. Stocks, ETFs, and mutual funds that have grown significantly over time are ideal.
When you donate appreciated assets:
You avoid paying capital gains tax
The charity receives the full market value
You may still qualify for a charitable deduction if you itemize
This single strategy can often produce more tax savings than cash donations ever will.
Qualified Charitable Distributions: The Hidden Power Tool
For those over age 70 and a half with traditional or rollover IRAs, this is usually the best option available.
A qualified charitable distribution allows you to send money directly from your IRA to a charity. That distribution never shows up as taxable income.
Why this matters:
It counts toward required minimum distributions
It lowers adjusted gross income
It can reduce Medicare premiums
It can reduce how much of Social Security is taxed
It bypasses charitable deduction floors and caps
For retirees who do not need their RMDs, this is often the most powerful and overlooked strategy.
Donor Advised Funds: Timing Flexibility
Donor advised funds are useful when income spikes.
Large bonuses, business sales, real estate sales, or final working years often create unusually high income. Donor advised funds allow you to front load charitable giving into one year and distribute the funds to charities over time.
They are not perfect. There are administrative fees, investment limitations, and contributions are irrevocable. Still, when used correctly, they can smooth taxes and restore itemization benefits.
The Best Order for Most People
For most individuals, the optimal order looks like this:
Qualified charitable distributions if eligible
Highly appreciated assets
Cash donations
This order holds true across most tax brackets and income levels. Individual circumstances may vary especially based on how your state handles QCDs.
Final Thought
Charitable giving should be generous, but it should also be intentional.
When you reduce taxes, you are not giving less. You are giving smarter. The money saved often allows you to give more over time.
Disclaimer: This article is for educational purposes only and is not personal financial advice. Every situation is unique. Consult a qualified professional before making decisions about your own planning.
Comments