Optimizing Your Charitable Donations

While last year presented market challenges, charitable giving continued to be strong. According to Giving USA, individuals, foundations, and corporations gave an estimated $500 billion to U.S. charities in 2022. There was growth in three of the four sources of giving last year, including giving by foundations, bequests, and corporations. However, giving by individuals declined as households dealt with multiple challenges including inflation, stock market changes, and shifting economic conditions.

Despite the ongoing uncertainty, as well as new challenges, the economic environment remains favorable for charitable giving in 2023. Additionally, charitable donations are a great way to benefit those in need and have the added benefit of a tax deduction. But what is the best way to give?

Give Appreciated Non-Cash Assets Instead of Cash

For those who itemize deductions, appreciated non-cash assets such as stock held for more than one year may offer an additional tax benefit in comparison to cash donations. A stock held for greater than a year that is donated to a qualified charitable organization removes the capital gains tax liability. It allows you to deduct the fair market value of the donation from your adjusted gross income (AGI) on schedule A of your federal income tax return. Choose shares with the lowest cost basis. Keep in mind, however, that the deduction for a donation of appreciated stock to qualified charities is limited to 30% of your AGI, but amounts over this can be carried over for up to 5 years. As shown in the example below, more can go to a charity by donating appreciated stock, and less can go to taxes.  However, one needs to confirm that your desired charity is set up to accept stock.

Note that highly appreciated stock in a portfolio may become a capital gains tax issue once the investor is ready to sell that position. The federal capital gains tax can be as high as 23.8% when the Medicare surtax applies. As you see from the example above, donating stock can increase the size of your gift, or conversely reduce the cost to you of making an equal size gift with cash.

Use Cash to Replenish Your Portfolio

If you want to maintain the shares in your portfolio, choose the lowest basis shares to donate and buy back the same number of shares using cash. Then, you still have the same value in your portfolio, but you have essentially given yourself a “step-up” in basis, without having to recognize a gain. This sets up the investor to have a higher cost basis than the gifted shares. Over time, this higher-basis investment increases the potential opportunity for tax-loss harvesting, which if available, will help further reduce future tax payments.

Donor-Advised Fund

While appreciated non-cash assets often are the best way to maximize charitable gifts, not all charities have the capabilities to accept these types of gifts. Another opportunity to donate and avoid capital gains would be to set up a donor-advised fund (DAF) at a custodian such as Schwab Charitable or a community foundation. If you have a DAF account, simply transfer the appreciated stock to the account, and you may qualify for a fair market value tax deduction if you itemize on the date of transfer. It also allows the investor to then decide over time how to donate assets in the fund to deserving charitable organizations. When compared to setting up a private foundation, donor-advised funds have minimal upfront costs, no annual payout requirements, and are housed under entities who handle most of the administration. This is a smart option for investors who are looking for efficient and knowledgeable grant making strategies while receiving tax advantages. Simply put, you pay no capital gains tax when the assets are liquidated, the cash proceeds can then be invested, and you can recommend grants to your favorite charities immediately or over time at your convenience.

Qualified Charitable Contributions

Anyone above age 70.5 with traditional tax-deferred assets is eligible to make Qualified Charitable Distributions (QCDs) up to $100,000 directly to a charitable organization, without the tax-deferred distribution counting towards ordinary income. These contributions can also satisfy one’s Required Minimum Distribution (RMD) for the year if they have one. Keep in mind, that your QCD cannot be made into a Donor-Advised Fund; it must be made directly to the charitable organization.

Consult With Your Advisor

While the above are some of the strategies for making charitable donations, it is important to note there are nuances around all available choices, and therefore is important to consult with a professional advisor.  A successful giving strategy should be done in conjunction with and integrated into your financial planning, portfolio management, and estate planning. A successful plan and strategy will be different for each family.

Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Madison Wealth Management does not provide tax, legal or accounting advice, and nothing contained herein should be taken as such. © Madison Wealth Management 2023