Cash is Not the Best Charitable Gift
Episode 205 – The holiday season is also the season of charitable giving which most people do through gifts of cash. But donating highly appreciated assets like publicly traded securities is much better.
Transcript of Podcast Episode 205
Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, cash is not the best chartiable gift.
As we near the end of the year, and with Giving Tuesday fast approaching on November 29th, thoughts go towards the holiday season and helping those who are in need through charitable donations. Most people make their charitable donations by mailing checks or using credit cards through an online portal for their favorite charities. In other words, they make their charitable donations in cash. Often, however, they have highly appreciated assets such as publicly traded stocks but, unfortunately, they don’t think about using that appreciated asset as a charitable gift. Appreciated assets would generally be a better choice than cash to donate. Not only would the donor be entitled to the same charitable income tax deduction as a cash gift, but they may also avoid the capital gains tax that would be due if the asset was sold.
Let’s take a look at a hypothetical example. John would like to donate $10,000 to his favorite charity. He is in the 35% tax bracket and itemizes his deductions. He contributes $10,000 in cash and receives a $3,500 deduction. John’s net cost for that contribution is $6,500. Instead of the cash, John has XYZ stock worth $10,000 which he purchased more than a year ago for $1,000. He gifts the stock to his favorite charity. He still gets the $3,500 deduction but also saves approximately $2,142 in capital gains tax if he had sold that stock, assuming that he is subject to a capital gains tax of 20% as well as the net investment income tax of 3.8%. (($10,000 – $1,000 = $9,000 capital gains)(23.8%) = $2,142). When the charity sells the stock, it will not be subject to the capital gains tax since the charity is a tax-exempt organization. John’s net cost for that contribution is $4,358. That’s a better deal for John, and the charity still gets its $10,000 donation.
What about those individuals who do not itemize deductions because the standard deduction is so large? For 2022, the standard deduction is $12,950 for single filers and $25,900 for married filing jointly. For 2023, the standard deduction is $13,850 for singles and $27,700 for married couples. Donating highly appreciated assets may still allow you to avoid the capital gains taxes that would be due if XYZ stock were sold.
Suppose that in our hypothetical example John really wants to keep XYZ stock because he believes it will continue growing. Well, all he has to do is use the $10,000 in cash that he originally planned to donate to buy more XYZ stock. In this way, his investment portfolio remains the same. The “wash sale” rule for securities only applies to securities sold or transferred at a loss, and then repurchased within 30 days. It does not apply to securities transferred with a gain.
Most major charitable organizations now accept publicly traded securities as donations. They may not, however, accept other types of capital assets such as real estate or cryptocurrency. While beyond the scope of this podcast, fortunately, many major donor advised funds (“DAF”), which qualify as a public charity, do. Accordingly, the donor can donate the asset to a DAF; the DAF liquidates the asset and then sends the proceeds to your favorite charity.
The next time you are thinking about donating cash to your favorite charity, look first to see if you have appreciated assets like stocks and bonds and consider donating that instead.
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