Everyone has their own reasons for choosing the organizations they support with charitable contributions. You might funnel all your charitable contributions to organizations that work to cure a disease that’s affected your family or donate primarily to the church you attend. You might spread a series of smaller donations across dozens of charities every year.
There’s no one “best” way to give to charity; how you allocate your charitable contributions is a highly personal decision for everyone. But what about the assets that you use to make those charitable contributions? Is it better to write a check or give away a piece of real property? Does it make more sense to donate cryptocurrency or stocks? What are the most tax-advantaged ways for you to give to charity, exactly?
Tax-Advantaged Charitable Contributions: Appreciated Assets
Donating assets that you’ve owned for at least a year and that have gained value since you bought them might be a win-win for you and your favorite charity. Using appreciated assets as charitable contributions is a common strategy for minimizing capital gains taxes.
Let’s say you want to make a $10,000 contribution to an organization you support. You have some stocks that have doubled in value since you bought them a few years ago, but they’re no longer providing the kinds of returns you’re getting elsewhere in your portfolio. If you sold off $10,000 in appreciated stocks, you’d pay capital gains taxes of 15 or 20 percent on the profits you had earned. Ultimately the sale would net you $9,000 or $9,250. Donating $10,000 in stocks directly to the charity lets you give the organization the full value of the asset. Plus, no capital gains taxes are owed and you get the $10,000 deduction.
Major charitable organizations are often able to accept direct donations of stocks and other securities, including cryptocurrency. Or, these assets may be donated to a donor-advised fund. You can take the full deduction in the year you make the donation but can spread out distributions to charity over time.
Using donor-advised funds can be especially beneficial if you want to donate a house, piece of land or other real estate to charity. DAFs typically have the resources to liquidate real estate, so this strategy saves you the hassle of having to sell the property yourself while still allowing you to avoid any capital gains taxes (assuming the real estate is worth more now than you paid for it).
Tax-Advantaged Charitable Contributions: Retirement Assets
Giving away money earmarked for retirement is probably not going to be advisable for someone who’s still working. But let’s say you’re already retired and have enough income from other sources that you don’t really need the money you’re required to take from your retirement accounts each year. Diverting the money from your required minimum distributions to charity can be done in a tax-advantaged way. If you’re older than 70 1/2, you can make a qualified charitable distribution (QCD) from your IRA; in other words, direct your yearly RMD to a charity and skip paying income tax on that money. Distributions from a 401(k) can’t be used as QCDs unless you rollover your 401(k) into an IRA.
You may also wish to consider bequeathing unused retirement assets to charity at death. This estate planning strategy allows you to use your yearly distributions in whatever way you wish during your life, and minimize the tax burden on your heirs and estate after your death.
Tax-Advantaged Charitable Contributions: Cash
Maybe you don’t have any appreciated assets you’re willing to part with right now, or you just prefer to make charitable contributions by writing checks. Donating cash is quick and convenient but generally doesn’t create any significant tax benefits beyond the tax deduction you’ll get from any qualified charitable donation.
That said, there are scenarios in which giving cash might be part of your tax planning strategy. For example, say you own capital assets that have lost value since you bought them. You want to get rid of them by donating them to charity. Instead of making a direct donation, it might make more sense to sell the assets at a loss and donate the proceeds. Then you can take advantage of tax-loss harvesting, using the capital loss from the sale to offset any capital gains taxes you owe that same tax year.
What Assets Should You Use as Charitable Contributions?
The answer to this question depends entirely on your assets, your financial priorities, your individual tax strategy and your overall financial plan. In other words: while giving appreciated assets is generally considered the most tax-advantaged way to donate, there’s no universal “best” way to make charitable contributions. You alone get to choose the organizations you want to support with your money. Consult your financial planning advisors for help with the logistics of making those donations happen.
Sachetta, LLC’s advisors are here to help you get the most out of your assets. From planning charitable contributions to planning for retirement and beyond, we work with clients so they can make the financial decisions that work for them. Contact us today.
Nick Forgione is a Certified Public Accountant and holds a Master’s Degree in Accounting from the University of Massachusetts Amherst. As Accountant with Sachetta, LLC Nick works with individual taxation and wealth management clients.