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An Adapted Insight from: 'Leading Advisors Reveal Year-End 2024 Strategies for Equity Comp and Company Stock' – Available to Premium Members on MyStockOptions.com

If this year has been a high-income year for you—perhaps due to equity compensation or other significant earnings—and you’re looking to give back, a donor-advised fund (DAF) can help you make a meaningful difference while reducing your tax bill. These funds are simple, efficient, and versatile tools for charitable giving, allowing you to make a larger-than-usual contribution now and support your favorite causes over time.

A donor-advised fund works like a charitable savings account. You contribute to the fund through a public charity (the fund sponsor) and receive an immediate charitable tax deduction for the donation in the year it’s made. Then, you can distribute grants from the fund to your favorite charities in future years at your own pace. This flexibility allows you to "delink" the timing of your charitable contributions for tax purposes from when you support specific causes.

For those in high-income years, contributing to a DAF can significantly reduce your taxable income while giving you time to decide which organizations to support.

Why Cash Isn’t Always King

Cash might seem like the easiest option for charitable giving, but it’s often the least tax efficient. Donor-advised funds accept a wide range of assets, including publicly traded securities, private company stock, real estate, and even interests in venture capital or hedge funds.

Donating appreciated securities, such as your company stock, offers the best tax advantages. Many people make the mistake of selling assets like stocks or mutual funds, paying taxes on the capital gains, and then donating the after-tax proceeds. By donating these assets directly to a donor-advised fund, you can avoid capital gains taxes entirely.

The Two-for-One Tax Advantage

When you donate appreciated securities that you’ve held for at least a year, you receive a charitable tax deduction for their full market value. At the same time, you completely eliminate the capital gains tax you would have owed if you had sold the securities instead. This creates a two-fold benefit:

1. A larger charitable tax deduction: Up to 30% of your adjusted gross income (with any excess deductible amounts carried forward for up to five years).

2. Avoidance of capital gains tax: More of your money goes directly to the causes you care about.

This strategy can amplify the impact of your giving. By reducing your tax liability, you free up more resources to contribute to the charities that matter most to you.

A Flexible Tool for Long-Term Giving

One of the best features of a donor-advised fund is its flexibility. You can contribute in a high-income year to maximize your tax benefit and decide later how to allocate those funds. It’s an ideal way to balance your financial goals with your charitable priorities.

If this year has been financially rewarding and you want to make the most of it, consider opening or contributing to a donor-advised fund. It’s a smart way to give back—and to make your generosity go even further.

Parkworth Wealth Management provides holistic wealth management services including financial planning, equity compensation planning, investment management, tax planning, and others, on a fee-only basis and as a fiduciary, acting in clients’ best interests. If you want to make greater impact with your charitable giving, schedule a complimentary consultation.