If you give regularly to charity, there's a planning strategy that could help you give more effectively while potentially reducing your taxes: combining a donor-advised fund with charitable bunching of appreciated securities.

Here’s how tax deductions work under the new One Big Beautiful Bill Act (OBBBA): 

When filing your taxes, you have two options for taking deductions: the standard deduction (a flat amount set by the IRS each year) or itemizing your deductions. Itemized deductions include State and Local Taxes (SALT), Mortgage Interest, Medical Expenses, and Charitable Gifts. Each of these deductions has its own phaseouts or deduction limits, but high-income¹ taxpayers often exceed the standard deduction and itemize through a combination of mortgage interest and SALT. If you itemize deductions, charitable giving can help you make an impact on the issues that matter most to you while potentially reducing your tax bill.

Tax-Efficient Charitable Giving: Three Key Concepts

Donor-Advised Fund (DAF)
Think of a DAF as your personal charitable brokerage account. You make a tax-deductible contribution to the fund today, but you can recommend grants to your favorite charities over many years. This strategy lets you tap into the immediate tax benefit while maintaining flexibility about when and where to direct your giving.

Charitable Bunching
Instead of giving the same amount to charity every year, this strategy "bunches" multiple years' worth of donations into a single year. This strategy might not be for everyone—charitable bunching requires careful timing and sufficient liquidity. It may not deliver meaningful tax savings if you're subject to AMT, live in a no-income-tax state, or can't comfortably fund multiple years of donations upfront.

Appreciated Securities
These are stocks, ETFs, or other investments you've owned for over a year that have grown in value. This strategy involves donating them directly to charity instead of selling them first in order to avoid paying capital gains tax on the growth and getting a deduction for the full current value.

How It All Works Together

By contributing appreciated securities to a donor-advised fund in a "bunching" year, tax-savvy donors create a triple benefit: they avoid capital gains taxes, get a large charitable deduction in one year, and maintain flexibility to support charities over time. Let's look at a fictitious couple, Sarah and Mark, as an example.

Sarah and Mark’s Situation:

• High-income professionals in California, Married Filing Jointly
  
  • 37% federal + 13.3% state = 50.3% combined ordinary income tax bracket
  • 23.8% federal + 13.3% state = 37.1% combined capital gains tax bracket
• $35,000 of itemized deductions each year:
  
  • $10,000 of state and local taxes 
    
    • This deduction is capped at $10,000 due to their income
  • $10,000 of deductible mortgage interest 
  • $15,000 of charitable contributions
• Hold $150,000 of stock they bought years ago for $50,000 (so $100,000 in gains)

Traditional Approach:
Typically, they donate $15,000 of cash each year, and over the next ten years, they plan to give a total of $150,000.

The Range Approach:
This year, instead of donating $15,000 in cash, Mark and Sarah opened a donor-advised fund and donated their $150,000 of appreciated stock before year-end. Here's what happens:

• They avoid $37,100 in capital gains taxes ($100,000 gain × 37.1% combined federal + CA capital gains rate)
• They saved $67,905  of income tax from the $135,000 increase in their itemized deductions this year (50.3% combined tax rate x $135,000)
• They still support the same charities by making $15,000 grants from their DAF each year for the next five years

In Years 2-10, they take the standard deduction since their SALT and mortgage interest deductions alone are not enough to itemize, but they continue directing grants from their DAF to the charities they care about.

Sarah gave the same $150,000 to charity over ten years in both scenarios. But by bunching contributions into a DAF using appreciated securities, they potentially saved $105,000 in combined capital gain, federal and state taxes—money that can go toward additional charitable giving, other financial goals, or simply improving her family's financial security.

Why Timing Matters: The 2025 vs 2026 Decision

The One Big Beautiful Bill Act (OBBBA) made two significant changes to charitable deductions for high-income taxpayers starting in 2026:

1. 0.5% AGI floor: You can only deduct charitable contributions that exceed 0.5% of your AGI
   
   • Example: If your AGI is $500,000, only gifts above $2,500 are deductible
2. 35% deduction cap for top bracket: Taxpayers in the 37% bracket can only claim a 35% tax benefit on charitable gifts

For high-income donors in the top tax bracket, acting before year-end could present a unique opportunity to maximize the tax benefit of their generosity.

The Charitable Giving AGI Limitation

The IRS imposes limits on how much of a certain expense you can deduct in a given year. When donating appreciated securities, the IRS limits your charitable deduction to 30% of your adjusted gross income (AGI) in any single year. For example, a taxpayer with $1 million in AGI who donates $400,000 of highly appreciated stock would have a maximum deduction in that year of $300,000 (30% × $1 million AGI), and a carryforward of $100,000 to future years.

Planning implications:

• For very large gifts, you may need multiple years to utilize the deduction fully
• Consider your timing: You might accelerate income in your bunching year (exercising stock options, Roth conversions, etc.) to increase AGI and maximize the 30% limit
• The unused deduction carries forward for up to 5 years—but it's lost if unused after that period
• This doesn't reduce the value of bunching—it just means very large contributions may need additional planning to optimize the tax benefit

The Bottom Line

This strategy makes the most sense when you give regularly to charity, have appreciated investments, and your typical annual donations don't exceed the standard deduction on their own. The combination allows you to be more tax-efficient without changing your charitable giving pattern or the organizations you support.

For high-income donors, acting in 2025 before new rules take effect in 2026 could preserve significantly more of their wealth for charitable purposes.

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^{1 Range defines high-income earners as those with household incomes above $250,000}

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