With all the changes in the recent tax bill, there were not many changes to charitable giving. For whatever reason, it seems that charitable giving from a financial and tax perspective has been an afterthought for much of the American financial culture over the last few years. While the government still incentivizes you to give money to charity, understanding how to give and the best ways to give can help you maximize the amount you want to give.
Charity Decisions
There is an interesting dichotomy in the charitable giving space when it comes to taxes. It almost feels like an unwritten rule that giving money away is “for the cause” and “not for the tax benefits”. I wonder if one of the reasons why this mentality exists is that many philanthropic plans for families and business owners are more reactive than proactive. People often give only after a friend, coworker, or relative asks for a donation. There is absolutely nothing wrong with that, to be clear. Spontaneous giving can often be a sign of a healthy financial situation.
To make matters worse, the financial industry largely overlooks charitable giving. Perhaps simply because donating the money is likely the exact opposite of investing it. But does that make donating wrong? Even in advisor education, donating to charity can sometimes feel like an off-limits topic relative to other aspects of a client’s financial life. It is interesting to think about it because many times, charitable people are ecstatic and filled with joy to talk about it.
It is a good thing to encourage people to donate and support causes they are passionate about, both reactively and proactively. Providing tax incentives to give back to those who are charitably minded, to give even more away, should be a win-win for everyone. So how do you take your charitable giving (if any) from a throwaway part of your cash flow to a prominent way to improve your financial situation?
Charity Deductions
The current deduction process for charitable deductions is largely dependent on one thing: you need to itemize deductions. Along with mortgage interest, state and local taxes, medical expenses, and some others, your total itemized deductions must exceed the standard deduction for your filing status. For 2025, the standard deduction is $15,750 for single filers and $31,500 for joint filers. Therefore, if the total itemized deductions for a married couple only add up to $30,000 (even if they were all charitable contributions), none of it would be tax-deductible.
Next, donations that span beyond the itemized deductions may not be completely tax-deductible either. Generally, you can deduct cash contributions up to 60% of your adjusted gross income (AGI). For example, take someone with $150,000 in income. A $50,000 cash donation to a qualified charity would essentially be entirely deductible. A $100,000 donation would only provide closer to a $90,000 deduction. Therefore, it is important to understand the implications of the dollars you plan to donate, albeit after you have decided whether to give in the first place, and how much.
The new tax bill, the One Big Beautiful Bill, did not alter this situation too much. One main change was allowing those who do take the standard deduction to deduct some charitable giving. Starting next year, taxpayers can now deduct charitable contributions up to $1,000 for single filers or $2,000 for joint filers without needing to itemize deductions.
The second main change is a new “floor” for itemized charitable deductions. Essentially, 0.5% of your AGI is not deductible for charitable purposes. For example, the same $150,000 in AGI would mean the total charitable contributions eligible for a deduction would be reduced by $750. A taxpayer with $500,000 in AGI would have their charitable giving deduction reduced by $2,500.
Charity Strategies
So, what is the best solution for the reactive nature of philanthropy and the more complicated tax situation? Two solutions: First, prioritize giving. Second, separate giving from taxes.
One of the reasons why giving is reactive is that there is not usually an intentional plan behind it. Generosity is clearly a virtue that many people desire, and philanthropy is clearly an important part for people who are past the survival stage of their personal finances. The way to prioritize giving is to plan out your giving over the next few years. Here is an example:
Suppose a couple starts donating to their alma mater or starts tithing to a church. If they decide to start donating $20,000 each year for the next 5 years, naturally, you expect a tax benefit to doing so. However, since the contributions are less than the standard deduction (ignoring all other itemized deductions), they will still claim a $31,500 standard deduction, regardless of whether the giving was $0 or $31,499. In other words, they will only receive the new $2,000 deduction since they filed with the standard deduction.
It can be beneficial from a tax perspective to move all of those donations over 5 years into 1 year. Without getting into the math too much, if instead there was a $100,000 donation in the first year (and their AGI was $150,000), they could deduct almost $90,000 that year. Then, in years 2-5, they could claim the same $31,500 standard deduction they were already expecting. That is an extra $50,000+ in deductions just by moving money around.
The second way to upgrade a giving plan is to separate giving from taxes. Especially since most giving is reactive and not proactive, it is possible to “give to charity” now, and then physically hand the money to your desired charity later. The most common way to do this is through a Donor-Advised Fund (DAF). DAFs allow you to donate money to an investment account and capture essentially the same tax deductions that have been discussed.
Deductions can be immediately claimed in the year of the contribution, even if you do not distribute the money from the fund to your charity of choice for years to come. Think of an HSA. Contributions are tax-deductible now, even though they may be distributed years or decades later. In our example of bunching up donations into the first year, it can be an easy strategy to still hand the school or church $20,000 each year, even though you donated $100,000 to the DAF in the first year. There are many rules around DAFs to understand, so do your research and speak with your advisor first.
Aligning Your Money with Your Mission
Ultimately, charitable giving is one piece of a larger financial plan. While in a silo, it appears that giving should be an “off the books” thing that doesn’t apply to the rest of your financial life. In reality, philanthropy and giving can be incredibly rewarding both emotionally and financially. There is nothing wrong with maximizing tax planning to increase your giving even more. However, it is important to step back and review the bigger financial picture to truly understand how to optimize your situation. Sometimes, bunching contributions into one year could work. Other times, DAFs can be a great resource. Ultimately, your finances should support your life and who you want to give to, not the other way around.
TC Falkner 