Client Background
A working-age client with a strong income approached us to refine their financial strategy. They were charitably inclined and held a significant portfolio of appreciated stock. Their goal was to maximize their charitable impact while optimizing their tax situation.
Challenge
The client’s itemized deductions were close to the standard deduction, meaning they weren’t fully leveraging their charitable contributions for tax benefits. Donating cash would have required selling appreciated stock, triggering capital gains taxes and reducing the amount available for charity.
Solution
We implemented a “bunching” strategy using a Donor-Advised Fund (DAF). Every other year, the client donated a large amount of appreciated stock to the DAF, which sold the stock tax-free, allowing them to claim a full charitable deduction based on the stock’s market value. In those years, they took the itemized deduction, which exceeded the standard deduction. In alternate years, they took the standard deduction and distributed funds from the DAF to their chosen charities, maintaining their annual giving without additional stock contributions.
Why Donate Appreciated Stock to a DAF?
Donating appreciated stock to a DAF allows you to contribute the full market value of the stock without incurring capital gains taxes, as the DAF sells the stock tax-free. This maximizes your charitable deduction and the funds available for your chosen causes.
By bunching deductions into a single year, you can exceed the standard deduction, significantly reducing your taxable income in that year, while still supporting charities annually through DAF distributions in subsequent years, when you take the standard deduction.
Results
This approach allowed the client to increase their charitable impact while reducing their tax liability. By alternating between itemized and standard deductions, they optimized their tax savings and maintained consistent support for their charities. The strategy provided flexibility and aligned their giving with their financial goals.
Are you maximizing the tax benefits of your charitable giving? Contact Michael Brady for a personalized consultation to discuss how your wealth can align with purpose and possibility.