Most SMI members are probably familiar with the tax benefits of donating cash to their church and other ministries. You may not be familiar with specific tax-saving strategies that can enable your generosity to go even further. These are tailor-made for strong performance years in the stock market, such as 2024.
Donating appreciated stock
Owners of a brokerage (non-IRA) account can maximize their giving while paying less in taxes. By donating appreciated stock instead of cash, you can itemize the market value of your securities while avoiding the capital gains taxes.
If you sell a long-term security (held for more than one year) at a profit, the taxes on those gains are based on your taxable income (income after deductions). Using 2024 figures, married couples filing jointly with taxable income between $94,050–$583,750 ($47,025–$518,900 for singles) are subject to federal long-term capital gains taxes of 15%. At higher incomes, the rate is 20%.
Also, if your adjusted gross income, or AGI (income before deductions), is more than $250,000 ($200,000, if single), you’ll owe an extra 3.8% net investment income tax (NI IT) on your profit.
For example, William and Hannah earn $300,000 and intend to give $30,000 of XYZ stock to their church. They purchased the stock more than a year ago for $10,000. If they were to sell the stock and donate the cash proceeds, they would owe $3,760 in federal capital gains and net investment income taxes (15%+3.8%) on their $20,000 gain. If their state imposes a 5% capital gains tax, they would owe an additional $1,000. After paying these taxes, William and Hannah would have just $25,240 left to give to their church. However, by donating the stock directly to the church, the couple’s tax bill would be zero and their church would receive the full $30,000.
Let’s suppose, however, that William and Hannah could afford to make a substantial gift to their church directly from their cash flow or savings, and they would rather not give up their XYZ investment. Here is a strategic approach. The couple could donate the stock to the church and, in turn, take cash from their income or savings (cash they otherwise would have donated) and repurchase the same stock. This makes their giving more tax-efficient, allows them to maintain their investment holding, and resets the cost basis on the stock, which could save them more in taxes in the future.
Which securities to donate
After deciding on your planned giving amount, look for the unrealized gains/losses report at your investment custodian, which should list each security by “lot” (or date of purchase). This report is sometimes called “GainsKeeper.” Next, filter or ignore any short-term lots (held less than one year). Finally, rank your long-term holdings by the highest percentage gains and select those lots until you reach your planned giving amount. You would then donate from the lots that are 1) long-term and 2) have the highest percentage gain.
A charitable organization must have a brokerage account to receive a stock donation. Therefore, donating stock typically requires contacting each charity to request the DTC (depository trust company) code of the charity’s investment custodian plus the charitable organization’s account number. You would then work with your custodian to complete the necessary forms for each charity.
If your church or other non-profit doesn’t have a brokerage account, or if you’d like a more convenient way to donate appreciated securities, there is another option.
Enter the donor-advised fund
A donor-advised fund (DAF) is a “giving account” you can open through a public charitable organization. These include independent charities (e.g., National Christian Foundation) and large custodial charities (e.g., Schwab Charitable or Fidelity Charitable). The money you donate to a DAF is immediately tax-deductible and may then be distributed to non-profit organizations of your choosing and timing.
Using a DAF simplifies the process of donating appreciated securities. DAF administrators have procedures in place to make such donations relatively easy. Also, if you have multiple charities you intend to support, you can make a single stock donation to the DAF, which will then distribute the proceeds to the charities as you direct. There’s no need to go through all the paperwork of donating stock to multiple organizations!
DAFs offer other helpful features too, such as the ability to set up recurring gifts and make grants anonymously. A DAF can also invest your account balance tax-free and establish a succession plan for the account.
DAFs typically carry an annual administrative fee between 0.60%–1.00% of the account balance.
Bunching your giving
Another way to boost your giving is by grouping multiple years’ deductions. For married couples, the standard deduction for tax year 2024 is $29,200 ($32,300 if over 65), which presents a high bar for itemizing but also a unique opportunity for donors.
Let’s go back to our under-65 hypothetical couple, William and Hannah. If they donated $30,000 of appreciated stock two years in a row, they could itemize that amount each year. However, itemizing won’t provide much of a tax benefit because $30,000 is only slightly more than the standard deduction. If, instead, they were to donate $60,000 of stock—i.e., two years' worth of giving—in the first year (and itemize), then claim the standard deduction in the second year, their deductions would total $89,200 ($60,000 in year one and the standard deduction of $29,200 in year two). Since Willliam and Hannah are in the 24% ordinary income tax bracket, moving up the timing of their donation would save them $7,008 in federal taxes ($29,200 x 24%)—in addition to the tax savings from long-term capital gains tax avoidance.
Here again, a donor-advised fund makes this relatively easy. It allows you to make multiple years of contributions in a single year, while perhaps spreading monthly grants to your charities over several years. That allows charities to continue to receive your donations during the “off” years when you are claiming the standard deduction. This strategy of “bunching” deductions can be especially powerful during years of unusually high income or strong stock market returns.
Key tax points
Here are four essential tax considerations to bear in mind related to donating appreciated assets:
The deduction for stocks and other appreciated assets is capped at 30% of your adjusted gross income. For example, if your AGI is $100,000, you can only itemize up to $30,000 of donated stock on your tax return that year (but you can carry forward any unused portion of the donation for up to five years).
The itemized value of your donation is based on the average trading price of your donated shares on the date of the donation. Yahoo Finance is a good resource for finding the historical high and low of each day’s trading session (use the quote lookup search box, then choose "Historical Data" to find the information you need). Report the itemized value of your donation on IRS Form 8283.
Do not donate securities that have generated capital losses. If you only have capital losses in your brokerage account, it is better to sell/harvest the loss for tax purposes and then donate the cash proceeds.
If using a donor-advised fund, you can’t deduct money sent from the DAF to the charities you select. Instead, you get the tax deduction when the money goes into the DAF.
There is more to explore on these advanced giving topics, so seek advice from a qualified tax professional before proceeding with any of these strategies. As you gain wisdom from an “abundance of counselors,” may your charitable giving be furthered even more to advance God’s kingdom.
