Donating to charity is often as simple as swiping your credit card or writing a check. However, for those looking to maximize their tax benefits, gifting different types of assets might be a more advantageous route.
In 2023, an estimated 34 million Americans contributed $3.1 billion during Giving Tuesday, marking a slight increase of 0.6% from the previous year, as reported by GivingTuesday Data Commons.
According to Michael Lofley, a certified financial planner and certified public accountant with HBKS Wealth Advisors in Stuart, Florida, one of the most effective assets to donate is profitable stock, assuming the charity can accept it. He explains, “By donating the stock directly to charity, you bypass any sales taxes, and the charity isn’t taxed when they sell it either. Essentially, this benefits everyone except the IRS.”
When it’s time to file taxes, individuals choose between the standard deduction and their total itemized deductions, which can encompass charitable donations, medical expenses, and state and local taxes (capped at $10,000), among other things. Since 2018, the higher standard deduction has led to only about 10% of taxpayers itemizing deductions on their 2021 returns, according to the latest IRS data.
For 2024, the standard deduction is set at $14,600 for single filers and $29,200 for married couples filing jointly. To benefit from the charitable deduction, your itemized deductions must surpass these amounts.
Mitchell Kraus, a CFP and owner of Capital Intelligence Associates in Santa Monica, California, cautions, “While giving cash is commendable, it isn’t usually the most tax-efficient method of donating.” If you’ve held profitable investments in a brokerage account for over a year, selling them incurs long-term capital gains taxes, which can be 0%, 15%, or 20%, depending on your taxable income, plus an additional 3.8% for high earners.
By donating appreciated assets directly, you can sidestep capital gains taxes on the growth. Typically, donors can deduct the asset’s market value, provided it’s been owned for over a year. Those who itemize can claim deductions capped at 30% of their adjusted gross income for donations to public charities.
With the higher standard deduction, financial experts suggest that investors might benefit by “bunching” or “stacking” their donations of profitable assets in certain years. CFP Paul Penke, client portfolio manager and operations director for Ironvine Capital Partners in Omaha, Nebraska, advises considering ‘stacking deductions in alternating years’ to surpass the annual standard deduction amount.
Penke recommends establishing a donor-advised fund as one strategy to accomplish this. Such investment accounts provide an immediate deduction and the flexibility to make future contributions to qualified nonprofits.
