Much has already been written about the updates in the new tax bill that was just passed. Most changes for individual tax payers are minor. We only focus on impacts to charitable planning here.
To start, for families with long-term and sizable charitable intentions, a donor advised fund (DAF) is still your best bet if you’re not already using one.
Changes to tax deductions related to charitable planning:
Deductions for non-itemizers: You can now deduct up to $1000 (single) or $2000 (family) for charitable contributions without needing to itemize. If you itemize deductions on your taxes, go to the next bullet.
Minimum threshold for itemized deductions: If you do itemize, then you must donate at least 0.5% of your income before you can start deducting charitable contributions. That is, if your taxable income is $500,000, you can only claim a deduction on donations above $2500. This new rule works in conjunction with #1 above.
Cap on value of deductions: For those itemizing deductions, the maximum deduction is capped at 35% of your donation. Therefore, if you are in the top Federal bracket of 37%, you get a slightly smaller deduction next year. If you were planning to fund or top-up a DAF, 2025 is the year to do it.
What does this all mean for a high net worth family?
If you are not yet at the stage of your life where you are making large charitable donations, then this bill helps because your family at least gets the $1000/$2000 deduction.
If you are more philanthropically inclined or would like to start planning for larger donations down the road, then 2025 is the year to open or top-up a DAF.
DAFs allow you to have a family giving vehicle without the administrative costs, hassles, and public disclosure of a private foundation. The largest providers like Schwab and Fidelity make it easy and fees are modest.
By making a sizable gift to a DAF and then spreading your donations out over many years, you also maximize your tax deduction. We illustrate with an example below.
Assume your family donates $25,000 per year. If you have no other itemized deductions, then you do not get any tax deductions for these donations.
If instead you donate appreciated stock (with a $0.50 basis) to fund 10 years of donations, or $250,000, you get two benefits. First, you get a tax deduction on most of your $250,000 donation. And second, you also eliminate the unrealized gain on your appreciated stock position, further saving capital gains taxes whenever that asset were to be sold. Below is the math:
Donation | 750,000 |
Tax rate | 37% |
Standard deduction | 31,500 |
Tax deduction | 250,000 - 31,500 = 219,500 |
Tax savings on DAF contribution | 37% x 218,500 = $80,845 |
Unrealized gain on appreciated stock | 50% x 250,000 = 125,000 |
Capital gains tax savings | 23.8% x 125,000 = $29,750 |
Total tax savings | $110,595 |
Hence your net cost for this charitable gift, after the tax savings is only $139,405.
And if you are in the top tax bracket and make this $250,000 gift in 2025, you get a 37% deduction instead of a 35% in 2026. Therefore if you wait until 2026, this 2% difference reduces your tax savings by $5,000.
While the changes for individuals in the current tax bill are small, some of the changes like the ones mentioned here do warrant tax and charitable planning in 2025 to maximize your long-term tax savings.
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