Charitable giving is the most flexible tax lever available to the household. Structured well, it produces the same total gift to charity, the same or lower cost to the household, and a lower tax bill than an unstructured gift. The tool is a donor-advised fund; the technique is bunching or gifting appreciated stock.
- 01Explain a donor-advised fund and its role in bunching.
- 02State the advantage of gifting appreciated stock over cash.
- 03Compute the effective cost of a charitable gift at different marginal rates.
The donor-advised fund
A donor-advised fund is a giving account. The household contributes cash or stock, receives the full deduction in the year of the contribution, and grants the funds to charities on any later timeline. The DAF is the tool that makes bunching practical: contribute a large gift in one year to itemize, grant to charities over the following years.
Appreciated stock
Gifting appreciated stock held longer than a year gives the household the fair-market-value deduction and avoids the capital-gains tax on the appreciation. The charity receives more (no tax friction) and the household spends less (no tax on the gain). Always gift stock before cash from a taxable account.
The effective cost
At a 32% marginal federal rate plus 5% state, the effective after-tax cost of a $10,000 cash charitable gift is $6,300. A $10,000 gift of long-term appreciated stock with a $2,000 cost basis has an effective cost closer to $5,200 — the tax deduction plus the avoided capital-gains tax.
- Donor-advised fund + bunching = itemize every other year.
- Appreciated stock beats cash from a taxable account.
- Compute the effective cost at your marginal rate.