A Sweet Tax Strategy: Double Dipping on Tax Savings for Charitable Giving

Written by Kyle Simmons | Nov 8, 2024 3:20:00 PM

Imagine biting into a fried OREO® cookie - that crispy, sugary exterior giving way to the creamy center. Now, picture a tax strategy that's just as deliciously layered. Welcome to the world of "bunching" charitable donations with appreciated stock, a technique that's like a fried Oreo for your taxes: a benefit wrapped in another benefit, fried, and dusted with powdered sugar.

This strategy combines two powerful tax-saving moves: concentrating charitable giving into a single year to maximize itemized deductions in combination with appreciated stock donations to avoid capital gains tax. Let's unwrap this tasty tax treat and see how it can boost your charitable impact while reducing your tax bill.

The Basics of Bunching Charitable Contributions into a Single Year

The idea behind bunching is simple: instead of making consistent annual donations, you concentrate multiple years' worth of giving into a single tax year. This approach can push you over the standard deduction threshold, allowing you to itemize and receive a larger tax benefit.

Bunching charitable contributions vs. not bunching. You donate the same amount over time, but the contribution amount will vary over for each year. Illustrative example below.

Comparing the Different Strategies for Charitable Giving

Level 1: Annual Cash Donations

A couple in the 37% tax bracket donates $30,000 in cash each year. Assuming their other itemized deductions don't exceed the standard deduction, they may not see any tax benefit from their charitable giving assuming they have no other deductions. The standard deduction for couples is $29,200 (single 14,600) for 2024. Giving money doesn't always need to be tax-efficient, but let's look at other ways the government can help you give more.

Level 2: Bunched Cash Donations in a Donor Advised Fund

The same couple bunches two years of donations, giving $60,000 in cash to a donor-advised fund (DAF) in a single year. They can now itemize their deductions, potentially saving up to $22,200 in taxes (37% tax bracket with $60,000 of itemized deductions) from their donations. The tax savings will differ based on a person's additional deductions and whether they are filing as Married Filing Jointly (MFJ) or Single.

Level 3 (The Fried OREO® cookie strategy): Bunched Appreciated Stock Donations in a Donor Advised Fund.

Now, let's add bite into that heavenly fried cookie sandwich. Instead of cash, the couple donates $60,000 worth of appreciated stock to their DAF. The stock has $30,000 in long-term capital gains. By donating stock, they not only get the same $22,200 tax deduction as in Scenario 2 but also avoid $6,000 in capital gains tax (20% of $30,000). Their total tax benefit is now $28,200.

Picking the Stocks to Donate

Picking the stocks to donate is very important.

For example, NVIDIA stock (see chart below) is up significantly over the past year. In this example, an investor bought $10,000 of NVIDIA stock in November 2023 and is now able to donate $32,000 to a charity, which avoids over $4,000 of capital gains on one stock alone.

It is important to consult a financial or tax advisor to select the right stocks to donate. Deductions for charitable donations can also be reduced based on your annual income so it's important to analyze the strategy with a qualified tax or financial planning professional before moving forward.

The Power of Donor-Advised Funds

A donor-advised fund is the perfect vehicle for this strategy. It allows you to make a large donation in one year for the tax benefit, then spread out your actual charitable giving over time. You can recommend grants to your favorite charities whenever you're ready, maintaining your regular giving pattern while maximizing your tax advantages.

This lump sum contribution is a great strategy for owners that have recently sold a business and want to maximize their deductions and giving ability.

Example of taking a $100,000 tax deduction in 2024 and granting the money to charity over the next few years.

More Than Just Tax Savings

While the tax benefits are significant, it's important to remember that this strategy isn't just about saving money - it's about increasing your capacity to give. The tax savings you realize can be redirected to further charitable giving, amplifying your impact on the causes you care about.

A Strategy for Thoughtful Givers

Bunching donations and using appreciated stock is a powerful combination for those who are charitably inclined. It's a way to make your giving more efficient, potentially increasing the amount you can donate without changing your out-of-pocket cost.

Like that fried OREO®, this strategy offers layer upon layer of benefits. You get the satisfaction of supporting your favorite causes, the joy of increased giving capacity, and the sweetness of significant tax savings. It's a win-win-win that any philanthropist with a sweet tooth for tax efficiency should consider.

Ready to implement your own 'fried OREO®' tax strategy? Let's talk!

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