Should I Donate Securities or Cash?
Charitable donations are a cornerstone of philanthropy, allowing individuals to support the church and other causes they care about and, in some cases, receive tax benefits in return. When considering how to donate, the choice between giving cash or appreciated stocks/mutual funds can significantly impact both the donor and the charity. Most people who are donating are using cash as a default, but is that the best approach? This article will compare these two donation methods, exploring their advantages, disadvantages, and tax implications.
Donating Cash
Advantages:
Simplicity: Donating cash is straightforward and easy to understand. It involves writing a check, making an online payment, or giving physical currency, which most people are familiar with.
Immediate Impact: Cash donations provide charities with immediate funds that can be used to meet urgent needs or invest in long-term projects.
Universal Acceptance: All charities accept cash donations, making it a versatile option regardless of the recipient organization.
Disadvantages:
Tax Efficiency: Cash donations are generally less tax-efficient compared to donating appreciated assets. The donor can only deduct the amount of cash donated, which might not leverage the full potential of their philanthropic dollars.
Liquid Assets: Cash donations require the donor to have liquid assets available, which might not always be the case.
Tax Implications:
Deduction Limit: Cash donations are typically deductible up to 60% of the donor's adjusted gross income (AGI) in the U.S. If the donation exceeds this limit, the excess can be carried forward for up to five years.
Itemizing Deductions: To claim a deduction, the donor must itemize their deductions on their tax return, which may not always be possible depending on the individual's financial situation and recent changes in tax laws.
Donating Appreciated Stocks
Advantages:
Tax Efficiency: Donating appreciated stocks and mutual funds can provide significant tax benefits. The donor can avoid capital gains tax on the appreciated value of the stock, which can be substantial if the stock has increased significantly since it was purchased.
Preservation of Cash Flow: By donating stocks instead of cash, donors can preserve their liquid assets for other uses.
Buy back the same security at lower basis: One of the uses for the freed-up cash flow is to buy back the same security that you just donated but it will now have a higher basis.
Lets look at an example that combines points 2 & 3: Lets say you bought stock at $100 per share 7 years ago and it is now trading at $200 per share. In this case if you have 300 shares. So you bought the stock with $30,000 and now your shares are worth $60,000. If you make $300,000 and you were looking to make a $60,000 donation for the year then you can donate the $60,000 in stock, avoid the capital gains tax and then simply rebuy the stock at $200 with the $60,000 in cash you wanted to donate. You would then have a higher basis in the stock moving forward. This is assuming you still want to own that stock and it still aligns with your goals and risk tolerance.
Disadvantages:
Complexity: Donating stocks can be more complex than donating cash. It involves transferring securities, which requires coordination with the charity and the custodian where you hold your assets. If you work with a financial advisor this should be something they can help you with significantly.
Acceptance: Not all charities are equipped to accept stock donations, so it’s important to verify that the chosen organization can receive and process such gifts.
However, if there is a charity that you want to donate securities to, you could use a Donor Advised Fund(DAF). A DAF allows you to transfer the security there instead of directly to the charity. Once your investment is transferred you can sell the investment in the DAF and avoid the capital gains tax. Once the funds are liquidated into cash, you can send the cash from the DAF to the charity of your choice. You still get the tax benefits but it just requires an extra step if your charity does not directly accept your shares of stock or mutual funds.
Tax Implications:
Capital Gains Tax Avoidance: By donating appreciated stocks held for more than one year, donors can avoid paying capital gains tax on the appreciation, potentially resulting in significant tax savings.
Deduction Limit: The deduction for appreciated stock donations is capped at 30% of the donor’s adjusted gross income(AGI), with a carryforward period of up to five years for excess deductions.
Itemizing Deductions: Just like cash, to claim a deduction, the donor must itemize their deductions on their tax return. Make sure you are aware of the current tax laws and consult a professional.
Valuation: If held for more than one year, the deduction is based on the fair market value of the stock at the time of donation, which can maximize the donor’s charitable contribution deduction.
Practical Considerations
When deciding whether to donate cash or appreciated stocks, consider the following factors:
Financial Situation: Assess your liquidity needs and the availability of appreciated assets in your portfolio.
Charity’s Capabilities: Ensure the charity can accept stock donations if you choose to donate appreciated securities. Explore the use of a DAF if needed.
Tax Planning: Consult with a tax advisor to understand the potential tax benefits and limitations based on your specific financial situation and tax status.
Donation Goals: Consider your philanthropic goals and how each method aligns with your desired impact.
Conclusion
Both cash and appreciated stock donations offer valuable benefits to donors and charities. Cash donations are simple and immediately useful, while appreciated stock donations can provide significant tax advantages and preserve cash flow.
Understanding the nuances of each method can help donors make informed decisions that maximize their charitable impact and tax benefits. If you have only been donating cash, but you have some taxable investments, it is worth considering donating securities instead. For personalized advice, consult with financial and tax professionals.
God Bless,
Phil Francois, CFP®
https://www.foundationwealthplanning.com/