Standard vs. itemized deductions

To receive a charitable tax deduction on your annual income taxes, you must itemize your deductions rather than choosing to take the standard deduction.

In a given year, you may take charitable deductions up to a limit that is calculated according to your Adjusted Gross Income² (AGI) and the type of asset that you are donating. AGI limitations are typically set at 60% for cash donations and 30% for donations of appreciated assets. 

Charitable giving that exceeds an individual’s AGI limitation may be carried forward and used over the next five years. This carryforward provision is a helpful tool as you engage in strategic, long-term charitable giving.

Marginal tax rate

In the U.S., taxpayers fall into federal marginal tax brackets based on income, which dictates the amount of federal taxes owed. As income increases, we are pushed into a higher tax bracket and owe a higher tax rate. The marginal tax bracket is the highest tax bracket that applies to you. Your overall tax rate is the “effective tax rate.” It will be lower than the marginal tax rate because you are taxed only on the amount of income that falls into the highest tax bracket.

Currently, tax rates can be as low as 10% or as high as 37%, and taxes are tallied according to each bracket you exceed. In general, the higher your marginal tax rate, the more valuable making charitable donations will be, as your charitable deduction will allow you to avoid paying your marginal tax rate⁵ on the income that you donate. Charitable deductions can also help lower your marginal tax rate by reducing the amount of taxable income or even pushing you back into a lower bracket.

2023 tax brackets (for taxes due April 15, 2024)⁴

We can’t talk about donating charitable assets without discussing the capital gains tax. A capital gains tax is a tax applied on the profit made from selling certain types of assets. A capital gain is calculated by subtracting the original cost of the asset from the total sale price.

The capital gain, or the profit, is assessed a tax when you sell the asset. The amount of tax you pay can vary. It may depend on how long the asset was held, if it’s a charitable donation, the fair market value of the asset, and its cost basis. Some of the more common assets subject to this tax are stocks, bonds, real estate, private equity, and other appreciated assets.

Short-term vs. long-term capital gains

Because the amount of tax depends on how long you’ve held the asset, capital gains are classified as either long-term (held for more than one year) or short-term (held for a year or less).

Short-term capital gains are considered ordinary income and are taxed based on your marginal tax rate⁵, which can be as high as 37%. Long-term capital gains are most often a flat rate of 0%, 15% or 20%. Holding on to an asset longer than a year almost always results in a lower capital gains tax.

Long-term capital gains tax rates for the 2023 tax year⁴

Contributing assets to your DAF account can help off-set capital gains taxes. Donating appreciated assets (held for longer than one year) gives you an added advantage because you gain a deduction for the full fair market value (FMV) of the asset but neither you nor the charity that receives the asset is taxed on the appreciation because the charity is tax-exempt. It’s a double tax benefit that would not be available if you were donating cash. Mixing and matching the assets you donate can maximize your giving—and your tax benefits. Learn more about the advantages of donating appreciated securities and complex assets.

The FMV is the price at which your asset should sell in the current market. Cost basis is the original value of an asset, usually the purchase price. When calculating cost basis, the amount may be adjusted for stock splits, dividends, and return of capital distributions.

Both FMV and cost basis are used by the IRS to determine capital gains, which is the difference between the asset's cost basis and the FMV at the time of liquidation. These measures are also used when an asset is donated to charity to determine the correct amount of tax deduction. Donors may be asked to provide an independent estimate for the value of the asset, which is known as the appraised value.

Including your DAF account in your estate planning means you can remove assets from your estate before the total value is taxed. If your estate plan makes gifts to charities via your DAF account, the estate could be taxed less. Because charitable tax strategies for estate planning can be among the most complex, be sure to consult an estate planner or other qualified expert.