People often consider giving cash or household items when it comes to supporting their favorite charities. Beyond the feel-good factor of the donation, there are two often-overlooked strategies, Qualified Charitable Distributions (QCDs) and donating appreciated stock, which can increase your impact while more efficiently lowering your tax bill.
Qualified Charitable Distributions (QCDs): A Win-Win for Those 70 ½ and Older
If you’re age 70 ½ or older or required to take Required Minimum Distributions (RMDs) from your IRA, a Qualified Charitable Distribution (QCD) could be a great way to donate to your favorite non-profit. Instead of receiving your RMD as income, then paying taxes on it, you can direct those distributions to a qualified 501(c)(3) charity. By gifting via a QCD, the IRS loses out on the taxes that would have been due from the IRA distribution. Additionally, depending on your income, a QCD could also lower or help maintain your Medicare premiums due to the IRMAA (Income-Related Monthly Adjustment Amount) rules.
Here’s how it works:
- Direct Transfer: The money must go directly from your IRA custodian (think Charles Schwab or Fidelity) to the charity.
- Up to $111,000: You can donate up to $111,000 in 2026 via QCD. This figure will increase with inflationary adjustments.
- No Itemization Needed: Even if you don’t itemize deductions, a QCD still provides a tax benefit by lowering your AGI. This is considered an above the line deduction, which is better than an itemized deduction which is a below the line deduction.
- Order of Operations: If you are subject to an RMD, you need to complete the QCD before you finish taking your RMD. Not the other way around, otherwise the QCD won’t count as a reduction to the RMD. Word to the wise, consider QCDs earlier in the year versus waiting until the end of the year.
Donating Appreciated Stock: Avoid Capital Gains & Boost Your Deduction
If you’ve held stock or equity positions in ETFs or mutual funds for the past several years, it’s likely increased in value since you originally purchased it. Instead of selling the stock and paying capital gains taxes on the profit, you can donate the stock directly to a charity and completely avoid the capital gains taxes due. You can deduct the value of the stock on the date of the donation, up to 30% of your adjusted gross income.
Example: Let’s say you purchased stock for $1,000 and it’s now worth $5,000. If you sell it, you’ll owe capital gains tax on the $4,000 profit. However, if you donate it directly to a charity, you can potentially deduct $5,000 from your taxable income and avoid the capital gains tax.
Important Considerations for Both Strategies:
- 501(c)(3) Status: Ensure the organization you are donating to is a qualified 501(c)(3) public charity. You can verify this on the IRS’s Tax-Exempt Organization Search tool (irs.gov/charities-non-profits).
- Record Keeping: Keep records of your donations, including dates, amounts, the charity’s name and tax ID. If you donate $250 or more, the IRS requires the charity to send you a donation receipt. Be sure to contact and coordinate the donation with the charity ahead of time.
Keep in mind, tax laws are complex and subject to change. Before implementing either strategy, it’s always best to consult with a financial advisor or tax professional to ensure it aligns with your individual financial situation.
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