Donor-Advised Funds: How Retirees Can Turn Tax Exposure Into Lasting Charity

For retirees, selling stock that has risen sharply in value can set off an unexpectedly expensive tax chain, including higher taxes, Medicare surcharges and the loss of deductions.

Take a hypothetical retired couple, both age 72. They own $100,000 worth of stock purchased decades ago for $20,000, and each year they give $10,000 to their church and the local food bank. If they sell the shares first, the move triggers about $20,230 in taxes and Medicare-related costs.

If instead they contribute the shares to a donor-advised fund, the outcome is very different. The donation can create an immediate deduction, avoid capital gains tax and leave behind a charitable account that their children can continue to advise.

This is not an unusual situation. Federal Reserve data for 2026 Q2 show that households headed by someone 70 or older hold 40.5% of all U.S. household stock and mutual fund shares outside workplace retirement plans.

How a Donor-Advised Fund Converts Appreciated Stock Into a Tax Deduction

Under Section 4966(d)(2) of the tax code, a donor-advised fund is an account maintained by a sponsoring charity. The donor makes the contribution now, claims the deduction now and later recommends grants to charities over time. IRS Publication 526 says the donor must receive a contemporaneous written acknowledgment confirming that the sponsor has exclusive legal control of the assets.

Two tax rules make the approach work. Stock held for more than a year can generally be deducted at full market value, and the embedded gain is never taxed. For gifts to public charities, including donor-advised fund sponsors, Section 170(b)(1)(C) limits the deduction to 30% of adjusted gross income (AGI). Any unused amount can be carried forward for up to five years.

Selling the Shares First Leaves This Couple About $20,230 Worse Off

Using these assumptions: tax year 2026, married filing jointly, and $200,000 of AGI from pensions, IRA required minimum distributions and taxable Social Security, selling the stock adds an $80,000 long-term gain and pushes AGI to $280,000.

The net investment income surtax applies once AGI exceeds $250,000 on joint returns, and that threshold is not adjusted for inflation. The sale also eliminates the new $6,000 senior deduction, which is reduced by 6% of income above $150,000. At $200,000, each spouse still gets $3,000; at $280,000, both lose the deduction entirely.

Because Medicare premiums are based on income from two years earlier, 2026 income determines 2028 premiums. Under the 2026 brackets, $280,000 is above the $274,000 threshold, which raises each spouse’s Part B premium from $202.90 to $405.80 per month.

Contributing the Shares Can Improve Year One by More Than $25,000

Now assume the couple transfers the full $100,000 of stock to a donor-advised fund in 2026. There is no sale and no capital gain. AGI remains at $200,000, which stays below the first Medicare surcharge threshold of $218,000, and they preserve part of the senior deduction.

They can deduct $60,000 in the current year, with the remaining $40,000 carried forward. A new 0.5% floor under Section 170(b)(1)(I) trims $1,000, leaving $59,000. Compared with the 2026 standard deduction of $32,200 plus the extra amounts for being age 65 or older, itemizing produces $23,500 more in deductions.

Their taxable income is in the 22% bracket, which in 2026 begins above $100,800 for joint filers. That makes the additional deductions worth $5,170. When those tax savings are added to the costs avoided, the first year is $25,399.60 better off. The fund can then keep distributing $10,000 a year in grants, just as the couple had been writing checks.

It is important to note that a deduction lowers taxable income, but it does not change AGI. What helps protect Medicare premiums is keeping the gain off the tax return altogether.

Three Ways a Donor-Advised Fund Gift Can Go Wrong

• Using a QCD for the fund. Qualified charitable distributions from an IRA after age 70½ are excluded from income, but Section 408(d)(8)(B)(i) does not allow them to go to donor-advised funds. Those gifts must go directly to charities, while stock can go into the fund.
• Receiving a benefit in return. If the grant provides you or your family with more than an incidental benefit, Section 4967 imposes a tax equal to 125% of that benefit. Grants to individuals can also be treated as taxable distributions under Section 4966(c)(1)(A).
• Donating a losing position. If the stock has dropped in value, selling it first may let the owner claim the capital loss and then donate the cash.

Successor Advisors Can Keep the Giving Plan Alive

Most sponsors allow successor advisors to be named, which means children can continue recommending grants after the original donor is gone. With the 2026 estate tax exclusion at $15,000,000, relatively few retirees will face estate tax. For most families, the main advantage of these funds is the income tax savings.

How much to contribute, which shares to use and when to make the gift are all questions worth reviewing with a CPA or fiduciary advisor before year-end. Donor-advised funds, QCDs and appreciated-stock gifts can also be considered together as part of a broader tax-smart charitable giving plan.