Three Charitable Giving Strategies That Can Help Boost a Portfolio’s Tax Efficiency

Making charitable donations is a way for clients to do good and save on taxes.  While most donations are made with checks or credit cards,¹ and can provide some tax advantages, there are likely opportunities for your clients to make tax-savvier choices about how and what to donate. Donors’ general lack of “awareness and understanding of non-cash giving vehicles and options,” is the number one obstacle to using other tax-smart donation strategies.²   

Advisors, therefore, can build deeper connections with clients, earn greater loyalty, and add additional value by educating clients on tax-efficient giving strategies—which will help turn a complex topic into an easily understandable and executable strategy. The best way to do that is to show them specific examples and/or hypothetical illustrations of common tax-smart strategies. This teaching approach will likely result in an “aha!” moment for clients when they fully grasp the savings potential of tax-efficient charitable giving. 

For ways to jump-start a conversation with clients about tax-efficient donation strategies, see our article, Helping Clients Make Their Charitable Giving More Tax Efficient.

1. Donate appreciated assets. Explain to clients that there’s more tax-friendly ways to give than writing a check. Since many clients invest in stocks, start by explaining how donating long-term appreciated assets works and how it can potentially trim their tax bill.  

To grab their attention, spell out the two key benefits of gifting winning stocks that they’ve held for more than a year that would trigger a sizable capital gain if sold:  

• They would avoid paying the capital gains tax. 
• They would also qualify for a charitable tax deduction for the fair market value of the asset. 

Next, nudge clients to overcome their hesitancy to tax-smart giving by using stocks sporting long-term gains. Statistics show that only a small percentage of clients with appreciated assets are taking advantage of this tax-saving technique. Even though 80% of donors own appreciated assets, only 21% of those donors have benefited by gifting long-term assets with gains to charity, according to The Center for Disaster Philanthropy.³   

The graphic below illustrates how your client can save on capital gains taxes and boost their itemized tax deductions by gifting a long-term appreciated stock to charity. Specifically, this example highlights the larger tax savings generated by gifting the entire market value of the appreciated stock—rather than first selling the stock, paying capital gains on the profit, and then gifting the remaining post-tax proceeds to charity. 

Walking clients through this type of non-cash donation option will help them better understand the concept of tax-smart giving. Going forward, committing to ongoing education and setting aside time to regularly review your clients’ portfolios for long-term appreciated assets that are candidates for tax-smart giving is a win-win for the advisor and client. 

2. Boost tax savings by “bunching” contributions. Due to changes in the tax code that increased the standard deduction, it’s more difficult for taxpayers to benefit from itemizing deductions on their tax return. However, “bunching” charitable contributions can solve that dilemma. Utilizing a bunching strategy—or grouping two years of charitable donations into a single year—can create tax savings. The goal of bunching is to increase the dollar amount of your client’s itemized deductions above the IRS’s standard deduction (which is $29,200 for the 2024 tax year), thus reducing the client’s taxable income.

Here’s how a bunching strategy can trim a client’s tax bill by allowing them to itemize deductions versus taking the smaller standard IRS deduction.

The example below assumes that a giver who usually donates $10,000 each year instead bunches two years of charitable contributions into a single year. This taxpayer also has $15,000 in deductions for mortgage interest and property taxes, thus boosting their total itemized deductions to $35,000.    

In this example, the tax-savvy client who bunches two years of charitable contributions into a single year, nets $5,800 more in tax deductions to offset earned income. 

Sharing this tax-saving tip with clients will allow them to better plan financially to execute a bunching strategy. 

3. Give to charity through a donor-advised fund (DAF). Another tax-efficient giving strategy for clients to consider is contributing through an investment account designed for charitable giving known as a donor-advised fund (DAF), such as those offered by T. Rowe Price Charitable.  

A DAF accepts irrevocable contributions, invests those contributions in a tax-deferred account, and then makes distributions to charities per the donor’s recommendations. 

The key selling point of DAFs is that these investment vehicles offer not one, not two, but three tax advantages to the client. Drive home the triple tax–advantage concepts:  

• Benefit from immediate tax deduction. As soon as the client makes an irrevocable contribution of cash or long-term appreciated assets to the DAF, they are eligible for a same-year tax deduction up to IRS limits if they itemize on their return.  
• Save on capital gains tax. If a client funds a DAF with appreciated assets, such as stocks or mutual funds, they’ll also avoid paying capital gains taxes on those assets.  
• Potential to boost gift size with tax-deferred growth. Contributions to DAFs also have the potential to grow tax-free before clients initiate disbursements to their favorite charities.  

Given the trio of tax benefits they offer, it’s no surprise that DAFs are popular, holding $229 billion in assets as of the end of 2022.⁴

Most clients aren’t fully up to speed on non-cash charitable giving options. To enhance their awareness of how they can boost the tax efficiency of their portfolios while giving to charity, walk them step-by-step through the three common tax-smart giving strategies. The more specificity the better, as clients will get a clearer sense of how these strategies work and, more importantly, how executing any one of these strategies can potentially net them sizable tax savings. Showing the client how they can save money on taxes is a win-win for you, as well as your client. The client will appreciate the assistance you offered in helping them give in a more tax-smart way, and that will go a long way to bolstering your client relationship in the long term.