I talked in the past about how to spend money to increase happiness, but you can also increase happiness by giving to charity. Studies have shown giving, instead of spending on yourself, can boost your happiness.
Although you can increase your happiness by giving to friends or family, I want to spend time talking about charitable giving because I find it is one aspect of finances people always wish they did more of and planned better.
I often hear, “Oh, I don’t give very much”, “I wish I gave more”, or “I am not sure how to give more consistently or what causes to support.” If you feel you need more structure around your giving, consider making a giving plan.
By writing down how much you want to give, what causes you want to support, and how often you plan on giving, you will create a structure to follow. It becomes very easy to assess your progress toward your giving goals.
Once you have your charitable giving plan, the next decision is how to give to optimize taxes. This is where I see most people trip up. The default method is cash or a credit card.
There is nothing wrong with giving cash or on a credit card. It is easy. It is quick. Nearly every charity accepts them. However, for many people, it is very tax-inefficient.
How To Give More Tax Efficiently: 3 Main Ways to Give
When giving, there are three main options:
- Cash/check/credit card
- Appreciated stock
- Donor-Advised Fund
Although cash is convenient, cash is usually not the best option, particularly if you have a brokerage account with appreciated investments. Types of investments you could give include appreciated stock a family member bought for you years ago, an investment you purchased over a year ago that went up in value, or restricted stock units (RSUs) held longer than a year that appreciated significantly.
I will talk about the pros and cons of each method and how best to give. Please keep in mind I do not know your personal tax situation. Everything I say is for informational and educational purposes only. You should do your own due diligence and consult a tax professional before taking action.
Cash/Check/Credit Card
You are at the grocery story and hear the ringing bell for the Salvation army. You drop a few bucks in the red tin. Or, you receive a request in the mail for a check or credit card donation to support kids in need. We are bombarded, particularly around this time of year, to give. There are many great causes to support.
Before you give, let us analyze how giving cash or on a credit card will affect you.
If you are like many people, you benefit from a standard deduction. This is the amount you can deduct from your adjusted gross income to determine your taxable income. It is line 12 of your tax return, pictured below.

Under the Tax Cuts and Jobs Act of 2017, the standard deduction was raised. For a single filer, the standard deduction is $12,400. For married filing jointly, it is $24,800. What this means is you need more than $24,800 in itemized deductions before you receive any benefit because you automatically receive $24,800 as a deduction without doing anything.
Itemized deductions include medical and dental expenses, state and local taxes, mortgage interest, gifts to charity, and casualty and theft losses. Below is an image of Schedule A, where you list itemized deductions. Most people are unable to itemize medical and dental expenses because it is limited to only amounts above 7.5% of your gross income. Most people also don’t have casualty and theft losses from a federally declared disaster.

This leaves state and local taxes, which are capped at $10,000, mortgage interest, and gifts to charity.
For example, if you are married filing jointly and have $15,000 worth of state and local taxes, $12,000 worth of mortgage interest, and $2,000 worth of charitable contributions, you would still take the standard deduction.
To break it down, since state and local taxes are limited to $10,000, you have $10,000 in that category, $12,000 in mortgage interest, and $2,000 in charitable contributions, for a total of $24,000. Since the $24,000 is less than the standard deduction of $24,800, you would take the standard deduction. In that example, even though you gave $2,000 in charitable contributions, you were unable to deduct any of it. From a tax perspective, you receive no benefit.
That is one downside of giving cash each year if you are unable to itemize your deductions.
Even if you are able to get above the standard deduction, it’s only marginally helpful unless you can get significantly above it. For instance, if you take the prior example, but made $4,000 in charitable contributions, you would have $26,000 in itemized deductions. It is only $1,200 above the standard deduction. If you are in the 24% marginal federal tax bracket, your income tax deduction is only $288 ($1,200 x 24%) for $4,000 worth of charitable contributions. If you divide $288 by $4,000 that is only 7.2%. In other words, instead of a 24% deduction on the full amount, you only received a deduction of 7.2% for the amount you gave.
If you give via a credit card, you likely are receiving 1-2% back , so for every $100 donation, you get $1-2; however, keep in mind the charity does not receive the full $100 donation. Most credit card transactions cost the charity 1-3% of the donation, so they may only receive $97-99. That is one downside of giving via a credit card. When giving cash or a check, the charity should receive closer to 100% of the donation. There are administrative costs to processing it, but when done in batches, it can be fairly efficient.
As you can see, giving, whether via cash, check, or credit card, is not helpful from a tax perspective unless you can itemize more than $24,800 worth of deductions in 2020.
Appreciated Stock
Now that you have seen how inefficient giving cash can be, let’s talk about giving appreciated stock. If you have investments you held more than a year, you can give them to charity and avoid the capital gains tax.
For example, if you bought a share of Apple stock for $50 and it is now at $120, selling it would incur capital gains of $70. If you were in the 15% capital gains bracket, that would be $10.50 of tax per share. If you originally bought 20 shares of Apple for $1,000, they are now worth $2,400. If you sold them and then gave cash, you could only give $2,190 after taxes. Although you sold for $2,400, you would have capital gains of $1,400, resulting in a tax of $210 at the 15% capital gains tax rate.
Instead, you could give the full $2,400 to charity in the form of Apple shares. You would not owe capital gains tax because you would be transferring the shares “in-kind” to a charity’s brokerage account. They would supply you with a donation letter saying you donated 20 shares of Apple. You could then take a fair market value deduction for the value of the shares on the day of the donation. In this example, it is $2,400.
Although you may not be able to itemize your deductions and take advantage of the $2,400 deduction, at least you avoided the capital gains tax.
If you wanted to hold the shares in the future and had planned on giving cash, you could give 20 shares of Apple and at the same time, buy back 20 shares of Apple. By doing this, you are establishing a new, higher cost basis. For example, if you bought 20 shares of Apple at $120, you now have a total cost basis of $2,400. This way when you sell in the future, you will pay the difference between the future selling price and $120 per share instead of the original $50 per share. In a way, you are raising or resetting the cost basis by giving shares and using cash to rebuy the shares.
Giving appreciated stock is also effective because it can be a form of a rebalancing. If you did not want to hold that many shares of Apple, by giving it away, you are reducing your exposure to it. You could use the cash you originally intended to give to buy another stock or part of your portfolio that is underweight.
There are limits to how much stock you can deduct from income. Stock donations, or non-cash assets, held for more than one year are limited to 30% of your adjusted gross income (AGI). For example, if your AGI was $100,000, you could only deduct up to $30,000 worth of stock donations. If you donated more, you most likely could carry forward the deduction up to 5 years. For instance, if you gave $50,000, you could deduct $30,000 in the current year and deduct $20,000 the following year.
Please keep in mind the carry forward of up to 5 years if you are unlikely to itemize deductions in the future. For example, if you gave $35,000 in the previous example and only had $5,000 to carry forward the next year, but had no other itemized deductions for the next 5 years, you would likely lose the $5,000 deduction after five years because you would only be claiming the standard deduction.
Although not everyone has appreciated stock to give, if you have it, it is usually much better to give then cash. If your parents bought you stock years ago or you earn RSUs through your employer, there is a good chance some of the shares have appreciated in value. Instead of paying capital gains taxes, transferring it directly to a charity helps your future tax situation. Please keep in mind the shares must be held more than a year to deduct the fair market value of the stock. If you donate shares held less than a year, you can only deduct your cost basis.
Although not all charities accept stock donations, many do. I recommend contacting any charities you want to support and asking if they accept stock donations. They should provide you with the information you need to transfer stock to their account. You can then contact your brokerage company to determine what you need to do to transfer the shares to the charity’s brokerage account.
As you can see, even if you can’t itemize deductions, contributing appreciated stock held more than a year can be an effective way of reducing capital gains taxes, increasing your cost basis if you rebuy the investment with cash you would have given anyway, and rebalancing your portfolio.
Donor-Advised Fund
Most people who give want to support multiple charities. In the previous example of giving appreciated stock, it is usually best if you want to support one or two charities with large donations. More than that and it becomes an administrative burden to transfer a few shares of stock to multiple charities.
This is where a donor-advised fund is effective.
A donor-advised fund is a charitable investment account you get to direct.
Instead of giving stock to one or two charities, you can donate the same stock to a donor-advised fund, receive an immediate tax deduction for the fair market value of the shares, and then make donations, or grants, to charities you would normally support over time.
Gifts to donor-advised funds are irrevocable, meaning once you make the donation, you can only make grants to charity – you can never get the funds back for personal use.
It is really easy to make grants from the fund. Once you have an online account set up, you select the charity and how much you want to donate. After you submit it, the sponsoring organization mails a check to the charity. The process takes about 60 seconds. If the charity is not in the system already, you may need to input more information and the sponsoring organization may reach out to confirm their non-profit status. Most charities receive checks within 5-10 business days.
An added benefit of a donor-advised fund is the funds can be invested and grow tax-free over time. For example, if you donate $10,000 worth of Microsoft stock to a donor-advised fund, the shares are normally sold and can be invested in a diversified mix of stocks and bonds. If the account grows to $20,000, you now have $20,000 you can give to charity.

The recordkeeping and organizing of your donations also become easier. Instead of receiving receipts from multiple charities throughout the year, you have one receipt from the charitable organization sponsoring the donor-advised fund. You receive the receipt when you donate assets to the donor-advised fund.
You do not receive a receipt for each grant you make to charity from the donor-advised fund. For example, in the earlier example, you would receive a receipt showing you donated $10,000 worth of Microsoft stock to the donor-advised fund. If you then made 10 grants to 10 different charities for $100 each, you would not receive a deduction for the $1,000. It simplifies what you need to track.
Plus, many donor-advised funds track your grants from the account, making it easy to see the types of organizations you supported in the past, how much went to each, and can help keep you accountable to your giving plan.

Another feature people enjoy is automated giving. If you donate $200 to your church each month, you can set up automatic grants from your donor-advised fund. Each month, the donor-advised fund will send a $200 check to your church without you needing to do anything.
Another way to effectively give is to bunch many years’ worth of gifting into one year. Going back to the idea of itemized deductions, you may not give enough in a current year to get above the standard deduction, but you might if you bring many years’ worth of gifting into the current year.
For example, if you give $5,000 per year, have $10,000 worth of state and local taxes, and $10,000 worth of mortgage interest, you are hardly above the $24,800 standard deduction if married filing jointly. However, if you knew you were going to give $5,000 for the next five years and had stock available to donate now, you could donate $25,000 of appreciated stock in the current year and then make grants from your donor-advised fund as you normally would.
In this case, you now have $45,000 worth of itemized deductions. You are receiving a much greater benefit from giving than you originally would have with only $200 more than the standard deduction.
It is also more helpful to bunch years of gifting if you receive a large bonus or higher income than normal. For example, if you received a bonus that bumped you into the 32% bracket, you may consider giving more than normal in the current year because you could receive a deduction of 32% compared to years of lower income when you are in the 24% tax bracket. It’s a good way to manage your tax bracket year-to-year.
For people with RSUs or more money in brokerage accounts, the idea of bunching charitable contributions is very effective. You can itemize your deductions and then in the next four years, take the standard deduction. Then, when the donor-advised fund is depleted, you can bunch another five years’ worth of gifting into the current year to cover the next five years of gifting. It is a more tax-efficient, smarter way to give.
I personally use Schwab Charitable for my donor-advised fund. The fees are 0.60% of assets up to $500,000 and then tiers down on amounts above $500,000. The minimum fee is $100. This is a worthwhile cost to ease the administrative headache of trying to donate to multiple charities and track the receipts. Plus, being able to invest the funds has allowed me to give more over time.
Summary – Final Thoughts
Charitable giving can increase your happiness. You are not alone if you feel like you do not give enough or feel paralyzed with determining how to give. I even made a giving plan years ago, but I have done a poor job of following it. This post is a reminder we can all do better and support the great work of charities in a more intentional way.
It is okay if you want to give cash or via your credit card, but if you have appreciated stock, you should consider giving it instead. Besides avoiding capital gains, you may also increase your itemized deductions to a level where you receive more of a benefit. If you cannot do it with a single year stock donation, think about using a donor-advised fund to bunch a few years’ worth of gifting into the current year. Although the tax savings are nice, it also can help reduce the administrative burden of tracking charitable contributions and the corresponding receipts.
Last, but not least, consider giving year-round – not just at the end of the year. It helps charities manage cash flow and helps alleviate the stress you may feel trying to do everything in the last few days of the year.
Good luck with your charitable giving!