Charitable Giving After a Windfall

Why the windfall year is the best year to give

A charitable deduction is worth more when your marginal tax rate is higher. If you give $100,000 to charity in a year when you're in the 37% bracket, the after-tax cost of that gift is approximately $65,000 (before the new 2026 OBBBA floor and cap—see below). The same $100,000 gift in a year when your income has returned to the 24% bracket costs you $76,000. The tax value of giving swings by $11,000 on a $100,000 gift just based on timing.

Three other reasons the windfall year is distinct:

• You may have highly appreciated assets. Business founders, equity holders, and long-term investors often hold securities or business interests with very low cost basis. Donating these assets instead of selling them eliminates the capital gains tax that would otherwise be owed and generates a deduction at fair market value—a double benefit unavailable in ordinary income years.
• The DAF timing advantage is largest when income spikes. A donor-advised fund lets you capture a deduction in the spike year while distributing grants over time. The deduction lands in the highest-rate year; the giving happens whenever it makes sense.
• Giving reduces the IRMAA exposure problem. If a large windfall creates a two-year Medicare premium surcharge (IRMAA), charitable deductions that reduce AGI can reduce or eliminate the IRMAA exposure for the first tier, though only if the gift is a QCD from an IRA or reduces taxable income materially.

New 2026 rules under OBBBA: what changed

The One Big Beautiful Bill Act (OBBBA), signed July 2025, changed three charitable deduction rules effective beginning in 2026. Windfall recipients need to understand all three before modeling the tax benefit of a large gift.¹

What this means in practice: If your AGI is $2,000,000 from a business sale and you're in the 37% bracket, the 0.5% floor removes $10,000 of deductible giving (the first $10,000 you give generates no deduction). On a $500,000 charitable gift, the floor is immaterial—only the first $10K is lost. The 35% cap means your effective deduction rate is 35% instead of 37%, costing you approximately 2 cents per dollar versus the prior law. Both rules reduce but do not eliminate the tax benefit for large gifts. The key point: giving is still highly tax-advantaged for high-income windfall recipients in 2026, but the math is slightly different than it was before.

60% and 30% AGI limits remain in place

The AGI limits on the deduction itself are unchanged by OBBBA:²

• Cash donations to public charities or DAFs: 60% of AGI. Excess carries forward for up to 5 years.
• Appreciated property (long-term capital gain assets) to public charities or DAFs: 30% of AGI. If you donate $3M of appreciated stock and your AGI is $5M, you can deduct $1.5M (30%) this year and carry the remaining $1.5M forward for up to 5 years.
• Cash to private foundations: 30% of AGI. Appreciated property to private foundations: 20% of AGI.

For large windfalls, these limits rarely create a binding constraint because AGI is also large in the same year. The carry-forward provision means gifts in excess of the limit are not wasted—they deduct over the next five years.

The most efficient gift: appreciated securities (not cash)

This is the most commonly missed charitable planning opportunity for windfall recipients: donating appreciated securities delivers two simultaneous tax benefits that cash does not.

1. You avoid capital gains tax on the appreciation. If you hold stock with a $50,000 cost basis now worth $500,000, selling it creates $450,000 of capital gains—taxed at 20% federal LTCG + 3.8% NIIT = 23.8%, or approximately $107,100. Donating the shares directly to a public charity or DAF bypasses this tax entirely.
2. You get a charitable deduction at fair market value. The deduction is based on the $500,000 current value, not the $50,000 basis. You did not pay the capital gains tax, and you still get the full FMV deduction.

Net result: a $500,000 gift of appreciated stock effectively costs you far less than $500,000 after taxes—because you avoided $107,100 in capital gains tax you would have owed if you had sold the stock first. The charity receives the full $500,000 (or the equivalent after the charity sells the shares, tax-free).

What can be donated in appreciated form?

• Publicly traded stock held more than one year (most common; most DAFs accept these immediately)
• Mutual fund shares and ETFs held more than one year
• Privately held business interests (DAF accepts, but requires an independent appraisal and Form 8283; timing must precede the sale agreement)
• Real estate (requires appraisal; some DAFs accept, many prefer CRT structure for real estate)
• Cryptocurrency (treated as appreciated property; DAFs accepting crypto are common)

The requirement for all of these is that the holding period exceeds one year and the donor transfers the asset directly—not first selling it and donating cash.

Donor-Advised Fund (DAF): the workhorse tool

A donor-advised fund is a charitable account held by a sponsoring public charity (Fidelity Charitable, Schwab Charitable, Vanguard Charitable, or others). You contribute assets, receive an immediate charitable deduction in the year of contribution, and then recommend grants to qualified nonprofits on your own timeline.³

How a DAF works in a windfall year

1. Contribute in the high-income year. Fund the DAF in the same tax year as the windfall—this is when the deduction is most valuable. Assets inside the DAF are irrevocable; you cannot take them back.
2. Assets grow tax-free inside the DAF. No capital gains taxes on growth or rebalancing. The DAF sponsor invests the funds in pools similar to mutual funds.
3. Recommend grants on any timeline. You advise the DAF on which 501(c)(3) organizations to support and in what amounts. There is no deadline; you can grant over years or decades.
4. The sponsoring charity handles vetting. The DAF sponsor confirms recipient organizations are qualified. You do not need to independently verify each organization's tax status.

DAF vs. private foundation: when the foundation makes sense

A private family foundation gives you full control over grantmaking, the ability to employ family members to administer the foundation, and the ability to engage in direct charitable activities (not just grants). The tradeoffs: lower AGI limits (30%/20% vs. 60%/30%), 1.39% excise tax on investment income, 5% mandatory annual distribution, annual Form 990-PF, and stricter self-dealing rules. For most windfall recipients, a DAF is simpler and more tax-efficient. A private foundation is worth considering at giving levels above $5–10 million where family involvement in the philanthropic mission is a priority.

Qualified Charitable Distributions (QCDs): for IRA holders 70½ or older

If you are 70½ or older and hold a traditional IRA, a qualified charitable distribution (QCD) is typically the most tax-efficient way to give from that account.⁴

A QCD transfers funds directly from the IRA to a qualifying public charity. The key tax advantages:

• The QCD does not count as taxable income. An ordinary IRA distribution is income; a QCD is excluded from income entirely.
• The QCD counts toward your RMD. For those subject to required minimum distributions (age 73 if born 1951–1959; age 75 if born 1960 or later, per SECURE 2.0), a QCD satisfies the RMD without the distribution appearing in your AGI.
• The QCD does not require itemizing. Because the income is excluded rather than deducted, you get the tax benefit regardless of whether you itemize.

The 2026 QCD limit is $111,000 per individual ($222,000 for married couples, each with their own IRA).⁴

Charitable Remainder Trusts (CRTs): income plus a deduction

A charitable remainder trust is an irrevocable trust you fund with assets—most often highly appreciated securities or business interests—that accomplishes three things simultaneously: avoids immediate capital gains tax on the contributed assets, generates an income stream to you (or other named beneficiaries) for a term of years or for life, and passes the remaining trust assets to charity at the end of the term.⁵

How a CRT works

1. Transfer appreciated assets to the trust. This is a completed gift; you cannot take the assets back. The trust is a tax-exempt entity, so when it sells the appreciated assets, no capital gains tax is owed at the time of sale.
2. The trust is invested and generates returns. Proceeds from the asset sale are reinvested; the diversified portfolio produces income.
3. You receive income distributions for the trust term. Either a fixed dollar amount annually (Charitable Remainder Annuity Trust, CRAT) or a fixed percentage of the trust's annual value (Charitable Remainder Unitrust, CRUT). When you receive this income, it is taxed under a four-tier system: first as ordinary income, then capital gains, then other income, then tax-free return of basis.
4. At term end, the remaining assets pass to charity. The charitable remainder must be at least 10% of the fair market value of assets contributed at the time the trust is created (an IRS requirement).

Partial charitable deduction in year of creation

When you fund a CRT, you receive a charitable deduction equal to the actuarially calculated present value of the charity's remainder interest. This deduction is subject to the 30%-of-AGI limit (for capital gain property contributed to the trust). For a $2 million contribution to a 20-year CRUT paying 5% annually, the charitable deduction might be in the range of $700,000–$900,000 depending on interest rates and term—and the trust itself absorbs the capital gains that would have been owed on sale.

When a CRT makes sense for a windfall

• Business sale with low-basis shares. Rather than selling all shares immediately, a portion is contributed to a CRT first, allowing diversification without full capital gains recognition at the moment of sale. The CRT provides income and a deduction in the spike year.
• Concentrated stock position. A large block of appreciated stock that would trigger enormous capital gains if sold can be diversified through a CRT over the trust term.
• Philanthropic intent is genuine and long-term. Because the trust terminates to charity, a CRT is only appropriate if you intend for the assets to ultimately benefit a charitable cause. If estate goals dominate, a CLT (see below) may be a better structure.

Charitable Lead Trusts (CLTs): for estate planning with a charitable component

A charitable lead trust reverses the CRT structure: income goes to charity first, and the remainder passes to your heirs at the end of the trust term. A CLT is primarily an estate-planning tool rather than a personal income tool—it reduces what ultimately passes to heirs while providing current charitable income.⁶

The most common form is a Charitable Lead Annuity Trust (CLAT), structured so that a fixed dollar amount is paid to charity each year for a defined term. If the trust's assets grow faster than the IRS assumed rate (the §7520 rate), the excess growth accumulates for heirs tax-free or at reduced gift/estate tax. CLTs work best in low-interest-rate environments or when you hold assets with strong expected appreciation.

For most windfall recipients, the DAF, direct giving, or CRT is more relevant than a CLT unless the estate planning dimension is a primary goal and the estate is large enough to make the gift/estate tax saving meaningful (i.e., above the $15 million 2026 federal exemption).

How charitable giving fits into the windfall plan

Charitable giving should be sequenced after the core financial structure is in place—not before. The recommended order:

The IRMAA interaction

Large charitable deductions can reduce MAGI, but only if they reduce taxable income. Because QCDs are excluded from income (not deducted), they directly lower MAGI and can reduce the two-year IRMAA lookback exposure. DAF contributions reduce taxable income via deduction, but the full windfall income still appears in the AGI calculation before the deduction. If IRMAA planning is a priority, coordinate charitable strategy with the CPA to understand whether QCDs, deductions, or Roth conversions are the better lever in your specific situation.

What a fee-only advisor does for charitable planning

Charitable giving after a windfall is not isolated from the rest of the financial plan—the amount, structure, and timing of giving affect tax reserves, income projections, estate plans, and IRMAA exposure. A fee-only advisor:

• Models the giving amount as part of the overall cash policy—so charitable allocations are deliberate, not ad hoc responses to emotional pressure.
• Identifies the most tax-efficient vehicle for your specific assets: appreciated securities vs. cash, DAF vs. QCD vs. CRT, depending on age, asset type, and estate goals.
• Coordinates with CPA and estate attorney on CRT/CLT structures that require legal drafting and tax analysis before any transaction closes.
• Applies the 2026 OBBBA rules correctly—the new floor, the itemized deduction cap, and the carry-forward mechanics require modeled analysis rather than rule-of-thumb estimates.
• Prevents premature or misdirected giving—the most common charitable mistake after a windfall is committing to large gifts before the tax reserve is funded or the income plan is set.

Get matched with a fee-only sudden-wealth advisor

Charitable giving after a windfall involves legal structures, tax year timing, asset selection, and coordination with estate planning. A fee-only advisor helps you give more effectively—not less—by ensuring the mechanism fits the asset, the tax year, and your long-term plan.

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