By Dr. Josh Daily, WCI Columnist
[AUTHOR'S NOTE: This column was drafted before the One Big Beautiful Bill Act (signed into law on July 4, 2025) took effect and therefore reflects pre‑OBBBA tax rules. Since then, two key changes may affect the examples provided:
- The SALT deduction cap has increased from $10,000 to $40,000 (for most taxpayers) beginning in 2025.
- A new charitable deduction of up to $1,000 (individuals) or $2,000 (married couples) is now available for those taking the standard deduction, starting in 2026.
While these updates may alter the numerical impact in the scenarios presented, the underlying strategic principles—clumping donations, donating appreciated shares, using Donor Advised Funds, and tax-loss harvesting—remain highly effective for many high-income professionals, particularly physicians who give generously or who have substantial taxable investment portfolios.]
For years, I gave to charity by donating cash. At the end of the year, I’d itemize my deductions and pat myself on the back, assuming I was maximizing my tax savings.
Only recently did I realize that while I was reducing my taxable income, I wasn’t saving nearly as much as I thought. Like many high-income professionals, I assumed I was receiving a deduction for all my charitable giving. However, the reality was that with today’s high standard deduction—$31,500 for Married Filing Jointly [2025 — visit our annual numbers page to get the most up-to-date figures]—much of my charitable giving wasn’t providing additional tax benefits.
For example, let’s say I:
- Have a SALT deduction of $10,000 (the maximum allowed)
- Pay $5,000 in mortgage interest
- Give $20,000 to charity
That brings my total itemized deductions to $35,000—which is only $3,500 more than the standard deduction. That means my charitable giving only reduced my taxable income by $3,500, not the full $20,000 I thought it did.
I’ve since changed my approach to maximize my tax savings while still giving the same amount to charity. Here’s how.
The Traditional vs. Optimized Giving Strategy
The Traditional Approach
Many high-income professionals take the traditional approach to charitable giving: they donate cash, itemize deductions every year, and assume all contributions reduce taxable income. While this can provide some tax benefits, it is often less efficient than other methods.
A More Tax-Efficient Strategy
Instead of donating cash every year, a better approach involves:
- Donate appreciated shares of index mutual funds instead of cash to eliminate capital gains taxes.
- Clump charitable donations every other year (or every third or fourth year) by either making larger direct donations to charities or contributing to a Donor Advised Fund (DAF), which allows charities to receive steady annual distributions while you take larger deductions in certain years.
- Replenish your brokerage account by reinvesting the cash you would have donated.
- Tax-loss harvest when markets dip to generate deductible losses.
- Use $3,000 per year of harvested losses to offset ordinary income while carrying forward the rest.
A Surprising Insight: Taxable Brokerage vs. Roth IRA
For charitable givers, a taxable brokerage account can sometimes be more tax-efficient than a Roth IRA. Unlike a Roth, taxable accounts allow tax-loss harvesting, which provides ongoing tax savings. This can be used to:
- Offset up to $3,000 per year of ordinary income.
- Accumulate large carryforward losses to offset future capital gains from selling stocks, real estate, or a business.
When combined with donating appreciated shares, a taxable account can replicate many of the tax benefits of a Roth IRA—plus the ability to tax-loss harvest.
More information here:
The Tax-Efficient Charitable Giving Strategy
Step #1 Max Out Tax-Advantaged Accounts, Then Invest in a Taxable Brokerage Account
After maxing out your 401(k), HSA, and Backdoor Roth IRA, invest additional savings in a taxable brokerage account using low-turnover index funds.
Step #2 Tax-Loss Harvest
When the market drops, sell investments at a loss and reinvest in similar funds. This allows you to capture tax-deductible losses without losing market exposure.
Step #3 Donate Appreciated Shares Instead of Cash
Once your brokerage account has significant unrealized gains, stop donating cash. Instead, donate appreciated shares, which eliminates capital gains tax on those shares while still providing a full charitable deduction for their market value.
Step #4 Replenish the Brokerage Account with Cash
Take the cash you would have donated and buy back index funds, effectively stepping up the cost basis and reducing future capital gains.
Step #5 Clump Charitable Giving Strategically
To maximize deductions, make lump-sum donations every second, third, or fourth year, either directly to charities or through a DAF. This allows you to:
- Take the standard deduction in off years.
- Itemize in donation years for greater tax savings.
Step #6 Continue This Strategy Throughout Life
Stick with low-turnover index funds to minimize taxable events. If your brokerage account grows too large, redirect surplus funds to other investments or expenses as needed.
Example: A Physician Family’s Tax Savings
Let's imagine this scenario.
- Income: $500,000 per year
- Charitable contributions: $40,000 annually
- SALT deduction: $10,000
- Mortgage interest deduction: $5,000
- Federal marginal tax rate: 32%
- Note that this chart assumes the old $30,000 standard deduction.
Why This Strategy Can Beat a Roth IRA
A taxable brokerage account allows tax-loss harvesting, providing deductions that a Roth IRA does not. Donating appreciated shares eliminates capital gains taxes, making taxable accounts similar to Roth accounts in terms of tax efficiency. The key difference is that taxable accounts experience some tax drag from dividends and turnover, which can be minimized by investing in low-turnover index funds.
However, Roth IRAs still provide benefits, including:
- Asset protection in some states
- Tax-free growth and withdrawals
- No ongoing tax drag
While the example above shows that a taxable account can sometimes outperform a Roth IRA on an after-tax basis, I strongly recommend using both. Most high-income professionals will invest in a taxable account regardless, so if they give generously to charity, this strategy should be applied.
More information here:
Top 10 Ways to Lower Your Taxes and Lower Your Tax Bracket
Tax Policies: Enjoy Them But Also Reform the Right Ones
Additional Benefits of This Strategy
- Eliminates capital gains taxes on donated shares.
- Maintains flexibility through a DAF.
- Allows continued investment growth by replenishing the brokerage account.
- Simplifies tax filing by alternating between the standard deduction and itemizing
The Bottom Line
Traditional charitable giving leaves tax savings on the table. By clumping donations, tax-loss harvesting, and donating appreciated shares, physicians can save $4,500+ per year while maintaining their charitable giving. A well-structured taxable brokerage account can outperform a Roth IRA for charitable givers, thanks to tax-loss harvesting and the elimination of capital gains taxes.
With a few strategic tweaks, efficient charitable giving can become a powerful tool for long-term wealth optimization.
How do you organize your charitable giving? Are you interested in saving as much in taxes as possible, or are you looking for less hassle? Do you clump your charitable giving?
Your “Author’s Note” stating that the new $1,000 or $2,000 deduction for a non-itemizing taxpayer is an “above the line” deduction is incorrect and probably should be changed.
Here’s what Harry Sit at The Finance Buff Blog recently wrote about that confusion.
“Some places reported that this deduction is “above the line.” It’s not true. This new deduction doesn’t lower your AGI. It doesn’t make it easier for you to qualify for other tax breaks. It doesn’t affect state taxes.”
IMO, the absolute best way to donate to charity for those of us who are over age 70 1/2 is to use Qualified Charitable Distributions from our Traditional IRA Accounts.
Those items aside, thanks for a sound article with some good suggestions for tax effective Charitable Giving.
You’re right—thank you for pointing that out. I did a bit of digging after your comment, and while many sources casually call it “above the line,” technically it isn’t for the reasons you mentioned. I appreciate the clarification. And I completely agree that for those 70½ or older, qualified charitable distributions are almost always the best way to give—I’m not there yet, but I plan to take advantage when the time comes. Thanks again for adding value to the discussion.
Thanks for writing in, Ritch. I’ve edited the post to reflect your clarification.
Ritch,
Here is the “technical” language:
The section in OBBBA is very short:
“SEC. 70424. Permanent and expanded reinstatement of partial deduction for charitable contributions of individuals who do not elect to itemize.
(a) In general.—Section 170(p) is amended—
(1) by striking “$300 ($600” and inserting “$1,000 ($2,000”, and
(2) by striking “beginning in 2021”.
(b) Effective date.—The amendments made by this section shall apply to taxable years beginning after December 31, 2025.”
It amends the 2021 version by changing only the amount and the date. You can look at the 2021 Form 1040 to see where it was placed and how it didn’t reduce AGI.
https://www.irs.gov/pub/irs-prior/f1040–2021.pdf
Somehow that link is already out of date. Here’s a good one: https://www.irs.gov/pub/irs-prior/f1040–2021.pdf
But it does prove your point on line 12b (12a is itemized deductions from Schedule A)
12a Standard deduction or itemized deductions (from Schedule A)
b Charitable contributions if you take the standard deduction (see instructions)
Interesting. It’s always a little tricky until you see the actual tax forms. It sounds like it is outside of the itemized deductions, but not technically above the line (AGI). Weird deduction eh?
Agree that QCDs are the best way to donate to charity for those eligible for them.
@WCI,
“Agree that QCDs are the best way to donate to charity for those eligible for them.”
Yes, EXCEPT for starting in 2026 (and for however long it lasts) the new $2000 donation slot that is fitting between AGI and the SD or itemized deductions should be taken first, because that buys you the direct savings of $2000*(marginal tax rate). For me on SS, the savings is compounded because the new extra Senior deduction puts me back where SS taxation is not maximized, so my savings is 22.2% or $888. QCDs while tax-free, they give no tax deduction on your other income.
Is that really right? How can you come out ahead taking income then donating it versus never getting the income?
@ WCI,
I thinking I am missing your point.
Your goal is to just donate $2000 to charity.
1. You can take $2000 QCD from TIRA and send to charity. Only thing it affects is your TIRA balance. It is tax-free withdrawal, does not effect your overall taxes.
2. You can take $2000 from any after-tax savings and donate it directly to charity and in 2026 you have a new place to put that on your tax return which will cause your taxable income to be lowered by the size of the deduction, which is $2000. So you will save 2000*(marginal tax rate).
short story
1. path # 1 donate $2000 to charity, doesn’t affect tax return.
2. path #2 donate $2000 and get tax refund in the process.
In my case the $2000 donation is only costing me 2000-888 or $1,112.
Very similar to old days where itemizing was the “thing” — donate and get a partial tax refund, but better in this case because the $2k is a direct SD added to whatever SD or itemizing you take.
But you then have to take the RMD. Which is taxable. The point of the QCD is to take the place of the RMD.
@WCI,
Well, I see your point, but this is first year of RMDs for me and I have no trouble covering RMDs with my QCDs and have been taking QCDs since 70.5 and been spending my TIRA down since age 60, so I don’t have problem of too much TIRA.
So, in your very narrow case where you are in RMDs and aren’t spending them to live off of — because why — your taxable is too big, or pension has it all covered, then:
Deferring an RMD of $2000, gives you the same result as taking the taxable $2000 deduction, except in a few narrow cases where a lower AGI of $2000 helps you.
Yes, QCD age is slightly different than RMD age right now and that could produce a situation where the QCD doesn’t make quite as much sense. Still a pretty darn good way to give to charity during those years though.
Thank you for the interesting article. The math seems to argue in favor of a strategy like this though for the sufficers out there the added complexity may not be worth it.
Would you mind showing your math in more depth for the table? I am curious if for a moderate income or single earner physician household if the tax benefit is worth the extra bit of work.
Thank you!
A quick way to ballpark whether clumping charitable giving will help is to start with the deductions you can’t clump—usually your SALT deduction (capped at $10K in this example, but moving forward will be capped at $40K) and mortgage interest. Add those together and compare the total to the standard deduction for your filing status.
The gap between that number and the standard deduction is your “dead zone.” Any charitable giving that falls inside this dead zone doesn’t actually lower your taxes—you’d get the same benefit from just taking the standard deduction.
To estimate the benefit of clumping, figure out how much of your charitable giving is in the dead zone each year, and then see if you could combine (clump) enough of it into certain years—say, every other year—so that more of your giving falls above the dead zone in those clumped years. The total charitable giving you can move out of the dead zone by clumping, multiplied by your marginal tax rate, gives you a good estimate of the extra tax savings compared to spreading your giving evenly every year.
The higher that standard deduction gets, the bigger that zone becomes.
Are you in a zero percent income tax state?
I live in Arkansas, which isn’t technically a flat state income tax state, but it functions like one because the top rate of 3.9% is reached at a relatively low income level (around $25,000). Because of that, clumping charitable contributions versus spreading them out is essentially a wash from a state income tax perspective. To keep the article from getting overly complicated—and since it doesn’t materially change the outcome—I left that detail out.
This article sounds like it is saying “losing money” is a strategy you should do more of because it will make my taxable account more useful.
I’m sorry if I don’t really buy into that. The statement that is correct is that “Taxable never wins over Roth in the long-term, unless your strategy long-lerm is to lose money. If that is your strategy, I suggest you get a new one. You and your heirs will be thankful you did.”
Thanks for your comment—you raise an important point. I’m not suggesting that charitable giving will directly make anyone wealthier, nor am I advocating for investing with the goal of losing money. Rather, my point is this: if someone is already committed to giving significantly to charity, using strategies like donating appreciated shares can reduce taxes compared to donating cash.
Similarly, I’m not suggesting anyone invest just to tax-loss harvest. But if you’re already following a typical White Coat Investor-style approach—low-cost index funds, buy-and-hold, broad diversification—then tax-loss harvesting when the opportunity naturally arises can provide additional tax savings along the way. It’s simply an optimization within a sound, long-term investment plan.
Josh,
I have no issue with you optimizing your taxable account with as you say, “a sound, long-term investment plan.” I’m just guessing your sound long-term plan doesn’t involve losing money “long-term,” otherwise it’s not very sound, is it? So long-term your strategy cannot outperform Roth, the math just won’t support that, IMHO. Sure, it can make taxable better, but just making it better is not what we are talking about.
I think we actually agree here—and I’ll admit the title was a bit click-baity. As I mentioned in the article, I’d almost always recommend maxing Roth space before investing in taxable.
The specific scenario I was referring to where a taxable account could theoretically outperform Roth is pretty narrow: Imagine two people each invest $100,000—one in a Roth, one in a taxable account holding a low-turnover index fund. In the taxable account, the investor periodically donates appreciated shares to charity, then immediately repurchases the same amount of stock with the cash that would have gone to charity, effectively stepping up the basis each time. That makes the growth on those donated shares functionally tax-free, as long as they were planning to give that money to charity anyway.
On top of that, the taxable investor can tax-loss harvest when opportunities arise, offsetting up to $3,000 of ordinary income annually. This example ignores the ongoing “tax drag” from dividends in taxable, and in reality I wouldn’t recommend this instead of Roth. But in this very specific context, the combination of donating appreciated shares and tax-loss harvesting could allow the taxable account to edge out the Roth.
As usual, it’s best to do both. Max out the Roth and invest the taxable account very tax-efficiently including tax loss harvesting and using appreciated shares owned for at least a year instead of cash for any charitable giving.
Josh,
I really don’t get your $100,000 example What am I missing? Let’s use the last two years 2023 & 2024 as a perfect example where they would have 25% appreciation (as a close example) to donate each year and forget about any cash infusions from outside, as they will do same to taxable as Roth on day one.
2023
T1 (taxable) donates $25,000 of appreciated shares to charity. Left with $100k plus dividends.
R1 withdraws $25,000 of appreciation and donates that cash to charity. If he could itemize that deduction that would most likely be better. Roth still left with same $100k plus dividends as T1.
Rinse and repeat second year, same result. No way for taxable to win. Also, for high income individual, dividends aren’t free, so T1 can’t win.
You really can’t come up with a situation where a taxable account could come out ahead of a Roth account? It’s not that hard to do.
Let’s say you start with $100K and you get a negative 10% return in year 1, then a 20% return in year two. So overall return is 8% cumulative or 3.92% annualized. Let’s also say you’re in the 0% LTCG/QD bracket (12% federal and no state) and you just reinvested any dividends or we can ignore dividends or whatever.
So you TLH after year 1 and book a 10% or $10K loss. $10K x 12% = $1,200 in tax savings. After year two, you donate the $108K to charity instead of cash. This gives you a huge charitable deduction given your income. Perhaps it reduces your tax bill by another 12%*$108K = $12,960. So you made an additional $14,160 plus the $8K you would have made in the Roth. Almost 3 times as much profit.
An extreme scenario? Sure. But the point is that it’s possible to come out ahead with taxable even earning money overall. You don’t need an overall loss to come out ahead.
@WCI,
I’m not following your math. Taxable wins a few hundred dollars over your two year period and that’s about it. Long term, taxable loses due to dividend drag. That $100k didn’t get there overnight it took a number of years to get there, but let’s just look at the two years as if they were done with your 2024 tax software. Remember $3k is max loss you can take per year, so based on that and a very low dividend of 1% reinvested to get your 10% and 20% returns. (Not reinvested doesn’t matter as you still have to pay the tax.)
Need an income for this couple of at least something that makes sense. I’ll give you benefit of low income of $150k taxable income, and I’ll even give you deduction for both over 65 of $32300. This is used for year 1 and in year 2 they take itemized deduction.
So year 1 taxable investor would pay $16,150 in tax ($150 being for dividends), but with the $10k loss they could deduct $3k @ 22% which saved them $660. Final tax $15,490, Roth investor pays $16,000 in tax. $510 advantage for taxable.
Year 2 – 20% gain and both taxable and Roth are back to $108k and the $108k can be donated from either account. Now the tricky part is what is the allowed deduction for itemized expenses, whatever it is, taxable and Roth get the same deduction, except taxable can tack on another $3000 loss, but this time it is in the 12% bracket and worth only $360, but the dividends are free this year. My software puts the donation allowed at something like $75k, but like I said it doesn’t matter as both investors get about the same.
Delta money saved for taxable is $870. More than probably used up in dividends costs of 1-2% of the taxable balance every year.
In my scenario, the rest of the capital loss is used to offset some gains in the taxable account, when investor that donated $108k out of taxable now needs to sell some stocks to pay the rent on the summer cottage!
I think we’ve beaten this one to death.
That’s only if you are losing money overall. The combination of donating appreciated shares to charity and capturing tax losses can certainly be worth more than Roth benefits. I mean, for many people in the 0% LTCG/QD bracket a taxable account is awfully similar to a Roth to start with. It doesn’t take much extra benefit to make taxable better. That said, I’m with you that I don’t think I’d ever put retirement money in taxable before maxing our available Roth accounts, even if only for asset protection and estate planning reasons.
In your example of clumping deductions at 4 year intervals are you assuming no property taxes? In my state the best you can do with property tax is to pay for two years worth in one tax year, thereby clumping deductions every other year. Am I missing something?
Good question—my example wasn’t about lumping property tax payments. In most cases, property taxes have to be paid every year, so that part of your deductions doesn’t really change. What I was illustrating was clumping charitable contributions into certain years. When you combine that approach with investing in a taxable account, taking advantage of tax-loss harvesting, and giving generously, it can create significant tax savings in some cases. The clumping piece is specifically about when you make your charitable gifts, not when you pay property taxes.
The Wall Street Journal has some great examples of saving on taxes by donating this year instead of next year.
https://www.wsj.com/personal-finance/taxes/new-tax-breaks-charitable-donations-e7e0dd91?st=97wEB4
That’s interesting. I wasn’t aware of those changes in recent bill. Thanks!
Does the 35% limitation not apply until next year? I’m not sure I realized that with OBBBA. If so, it would make a lot of sense for me to donate extra this year.
Josh nice article dude! the point that a taxable account can be more favorable over Roth is quite profound and Physician on Fire wrote about it here: https://www.physicianonfire.com/taxable-account-roth/
Bascially the only way taxable can be better than Roth is if you have low taxable income where you don’t itemize and take the standard deduction and stay in the 0% LTCG bracket, and you do the Yield Split Method of asset location as mentioned by Kitces here: https://www.kitces.com/blog/yield-split-asset-location-tax-drag-alpha-efficiency-index-funds/
Probably not applicable to the high income earners reading this blog and also for people who are satisficers and not optimizers, but for FIRE people, especially lean FIRE, a taxable account is super powerful where it can edge out a Roth.
There’s another issue also. I believe in 2026. The maximum deduction is at the 35% rate not the 37% rate. If you are a large donor donating this year him in the 37% rate you get a full deduction. Next year you can only deduct the 35% rate. So if you have a large deduction, you might be tempted to give it now. However, if let’s say you gave at the beginning of this year and instead plan on giving at the end of next year, that would be two years of gain so that you would be missing out on so you could actually be more profitable, depending on your gambling tolerance to hold off if you think the market will go up by more than 2%
Assuming you are maintaining market exposure (which you say is the scenario in your article), Tax loss harvesting only defers taxes, it does not reduce taxes. If you capture the downside, you reset your cost basis lower. This means when you sell again, your gain is larger and mathematically equivalent to: final gain – losses harvested = original gain. This is somewhat analogous to how ETFs defer taxes compared to the same fund in mutual fund form.
It reduces them permanently if the gains are never realized due to being given to charity or the step up in basis at death. The deferral has value too. Plus if you use losses against $3K of ordinary income there’s an arbitrage there since they gains will later be paid at LTCG tax rates.
ETFs can also flush appreciated shares out of the fund to Authorized Participants. That’s a good thing, not a bad thing and hardly window dressing.
Thanks for the clear, concise explanation of the DAF process. I just opened one recently but this helped me solidify I made the right choice and help me with the steps.
I live in Colorado where since I’ll itemize moving forward mainly due to a new mortgage, I can no longer use donations as an itemized state tax deduction (unless I’m missing something because the rule doesn’t really make much sense to me). Does anyone know if this DAF strategy will eliminate state capital gains as well?
The WSJ article linked above mentions this but I think it’s worth pointing out. With the big beautiful bill, the first 0.5% of annual income donated each year gets no tax deduction for itemizers. That’s a sizeable number for many of us. I’m strongly considering doing every other year donations (jan- dec- skip a year or something) given this issue. Why give the government a thousand+ lbucks I don’t have to? More for charities.
Yes, it should eliminate state taxes on LTCGs too.
If you’re anywhere close to the standard deduction bunching can certainly make sense. But if you give $500K a year, maybe not so much.