Planning to give effectively can be quite tricky. In my first year of giving, I saw almost no reduction in my taxes due to donations because I wasn't planning carefully. This time, I was determined to find a better solution, and I would like to share it with you. As you will see, good tax planning can save you thousands of dollars in taxes, allowing you to donate more or just save more for yourself.

As we go through this post, we will run through a simplified example of Joe, a donor who is single, pays 30% in marginal income tax (including state taxes), has an AGI (no, not that AGI) of $100k and donates $10k a year. We will assume Joe's state has the same rules as the federal taxes and assume no changes happen to Joe's wages or tax rates. You will have to adapt this to your life situation, of course, but the general strategy should work for most people. 

Important Edit: I've been informed that I made a mistake on the amount of appreciated stock you can donate. Please refer to the section on lower cap for donating securities for a correction

How tax benefits for donations work

When you donate, you get a tax deduction. This means your income for tax purposes goes down, so you don't pay taxes on the money you donate. However, as we'll see, it's more complicated than that.

From 2026, if you use the standard deduction, you can only deduct $1000 ($2000 if married) for charitable donations. This is better than it used to be in the last several years, but it's still a small fraction of what an effective altruist can expect to give. 

If you don't use the standard deduction, you have to itemize. This does mean you can also claim other expenses such as medical expenses and state taxes, but for most people it is better to use the standard deduction, so you will often lose out on most of the tax benefits through this avenue too. 

There are limitations to itemizing too. First, the first 0.5% of your AGI in donations cannot be deducted. Second, there is a cap, which has now been permanently raised to 60% of AGI. Note, however, that some states still use the old 50% cap. 

So if Joe uses the standard deduction, he gets $17.1k in deductions. Now let's assume that Joe has $6k in other itemize-able deductions. If he itemizes, he only gets $15.5k. He chooses the standard deduction, still paying taxes of $9k on his donations, and saves only $300 in taxes. Only 10% of his donations got deducted. Not great.

Bunching

Now if you've been paying attention you might already realize what's the solution - Bunching. Bunching means donating not every year but on a slower cadence. Bunching is becoming significantly better of a strategy in 2026 due to the changes I mentioned above. Higher AGI cap, losing the first 0.5%, and the increased opportunity cost due to the new deduction that can be claimed in addition to the standard deduction.

Joe decides to bunch, donating 50% of his AGI every 5 years. This time, when he finally donates, he gets $56k in itemized deductions instead of the $16.1k of the standard deduction. He gets approximately 80% of his donations deducted (considering the opportunity cost of the standard deduction), and saves around $12k in taxes, $2.4k annualized, saving him $2.1k (annnualized) every year over the naive scenario. Joe could also donate 1k every year he doesn't bunch, which would save him a bit more.

However, you may have noticed a flaw with this strategy. Joe's money was just sitting in the bank throughout this time. Inflation has decreased the value of his donations. He could have donated more if only he invested his money. Now, if he just sells his stock before donating, he will have to pay taxes for that. So that's also not ideal.

If he invests his money, and then donates the appreciated stock, not only does he have more to donate, he actually saves more money on taxes because he is now donating more money. Stock donations earn deductions by their fair market value, that is, the same amount you would get for selling. 

Let's assume Joe's portfolio went up 25% in 4 years. He now donates after 4 years to match the increased amount available for donation. For his $40k invested, he can now claim the same $40k more in deductions as shown above, getting a 100% effective deduction rate or $3k tax saved annualized.

But wait, we can do even better than that.

Tax Loss Harvesting

Tax loss harvesting means selling assets at a loss, only to rebuy them later, in order to create a taxable loss event, lowering your taxable income. In the process, you lower the basis cost of the asset, which means that this strategy is usually only a way to delay taxes - not super useful to most people. Unless - you never pay the taxes, because you donated them. Now it's just pure tax savings.

Do note that you can only claim up to $3000 in capital losses (unlike other things, this doesn't get doubled if you are married) but you can losses to offset income (such as from dividends within your donation fund, or other funds you have). If you have more than $3000 in losses, you can carry in forward to next year. 

So, how do you harvest tax losses? You can try to do it yourself, or if you have a lot of money your advisor can do it for you, but for the retail investor, the best solution is some sort of automatic solution. Robo-advisors (fancy name for automated investing software) like Betterment can do it for you. However, those usually don't do an amazing job at it because they invest in broad ETFs. If you own, for example, an S&P 500 ETF, you can only harvest losses if the entire index goes down, but if some stocks go down but some go up, you can't.  

This leads us to direct indexing. Direct indexing offers the same diversification and low fees as a portfolio built on ETFs, but without the ETF. It's just automated software that owns the underlying stocks and executes trades to make it track an index. Direct indexing allows you to harvest all the losses of individual stocks without compromising on diversification. 

There are two direct indexing services available to retail investors that don't charge exhorbitant fees - Wealthfront and Frec. They have similar fees - only 0.09% for S&P 500, not much more than an ETF. The main difference (as of writing this post) is that Wealthfront has a lower minimum of $5k vs Frec's $20k, while Frec offers more options for indices, including global diversification. Here's a Frec referral code for $250 if you want to go with that. Note that if you want global diversification the minimums are higher and so are the fees. Also note that direct indexing does have some downsides, such as higher tracking error and higher trading fees, but those certainly have much smaller impact than the tax savings in this case.

How much can you save this way? According to Frec, you get harvested losses of approximately 25% of the money invested within 3.5 years, and that's about twice as much as you get from ETF-to-ETF loss harvesting. 

This works even if you don't bunch. You just need to wait a few years for the stock prices to move before you hit diminishing returns and then you can start donating every year. 

Now Joe, having learned about direct indexing, opens an account and makes it his donation fund. By waiting several years before donating the money, let's assume he makes the amount Frec suggests. That's $2.5k in extra deductions every year, or $750 saved. This gets Joe to an annualized $3,750 in tax savings.

Modifications to the strategy

Margin Investing

Both Frec and Wealthfront offer you a portfolio line of credit. Frec is better, offering higher limits and slightly lower interest rates. Use this credit to invest even more. This is a risky strategy, of course, but on expectation, the stock market will beat those loan rates. Using the line of credit will also allow you to double up your tax savings. 

Should you take this risk? I would say yes. First, just the extra tax loss harvesting should earn you back more than a third of the interest according to my back of envelope calculation, knocking the rates down to something similar to what you could get in a risk-free savings account. Second, while this may be too much of a risk for personal savings, for charity, you are only a small part of your preferred charity's funds. The risk that you are creating for them by leveraging is very small. Even if everyone who reads this post starts leveraging, I am not worried that this will suddenly make charity finances significantly less predictable.

Yearly contributions with the standard deduction

You may, in addition to the strategy above, give the max allowed in addition to the standard deduction every year. From a financial standpoint, I don't think this is advisable in most circumstances, since you lose out on the tax savings from tax loss harvesting which are quite significant. 

Opening your own DAF

A DAF is a donor advised fund. It's essentially a way to first donate, then invest, then distribute the funds. You get a deduction when you contribute to the fund and later you can make distributions from it. Daffy is a company that offers them to retail investors, otherwise these used to be only for millionaires. It costs $36 a year and you can use it to invest in pretty much anything.

There are two reasons you might use a DAF in your donation strategy. The first is just as an intermediary. Not every charity accepts appreciated stocks, and DAFs allows you to sell the stock without paying taxes, and then donate to almost any charity registered in the US.

The second is as a way to keep growing your portfolio. If you're one of the people who believe that donating later, after your funds have grown more, is better than donating sooner, this option is for you. You don't want to wait on your donations too much or you exceed the AGI limits. So instead of giving to charity every several years, you move the money from the direct indexing fund to the DAF at this time. This is treated as if you donated the money now for tax purposes but you can continue to invest within your DAF. 

What you don't want to do is contribute directly to your DAF because then you lose the opportunity for tax loss harvesting.

How to adjust to your personal situation

I donate a large percentage of my income

Even if you donate close to the AGI cap, you can benefit from tax loss harvesting. Just be aware not to go too far beyond the capital losses you are allowed to take per year.

I am already itemizing deductions

You will still benefit somewhat from bunching due to the first 0.5% not being deductible. Still, consider donating on a faster cadence due to smaller advantages from bunching. The tax loss harvesting still works.

If you are only itemizing deductions in a certain year, considering making that year the year you donate.

I expect my income to be higher/lower in the coming years

If you expect to hit higher tax brackets, wait until you reach them, then donate. If you expect to go to a lower tax bracket, try donating before you get there. Adjust the timing of your big donation year to your circumstances.

Lower cap on donating securities

When I wrote this post I was not aware that the IRS has a rule that limits your stock contributions to only 30% of your AGI. Note that this cap still allows you to donate up to 30% more of your AGI in the same year in cash. This should change some of the numbers you see but not too dramatically. 

I think the tax advantages of investing probably make it worth it in most cases to invest first rather than donate cash for most people, but people who donate a large percentage of their incomes or who have only a small amount of itemizable deductions may want to consider donating both cash and securities in order to take more advantage of bunching or be able to donate a higher percentage of income every year.

Conclusion

The following process is recommended for US-based donors:

Invest your donation funds into a direct indexing fund, with Wealthfront or Frec. Don't wait until end of year, donate more often to allow the funds to appreciate. Use the portfolio line of credit to double up on your tax savings and your gains

Once every several years donate 50%/60% of your AGI, either to your own DAF or by donating appreciated securities. Adjust the timing to fit your tax situation, to leave enough in the direct indexing fund, etc.

Example annualized tax savings for Joe from various strategies:

• Naive: $300
• Bunched: $2,400
• Bunched with investment: $3,000
• Direct Indexing + Bunching: $3,750
• Direct Indexing + 30% Margin + Bunching: $4,150

Please let me know if you have any questions or suggestions on how to improve this strategy even further. 

References

https://www.daffy.org/resources/obbba-charitable-deduction-changes

https://www.benkuhn.net/bunching/

https://www.givewell.org/about/donate/donor-advised-fund#Contributing_to_GiveWell-s_DAF_versus_selling_securities_and_giving_in_cash

https://www.irs.gov/taxtopics/tc409