Written by: Angela Parziale, CPA, MST
Managing a complex portfolio involves unique challenges and opportunities, especially when optimizing your financial strategies. While some aspects of your financial situation may be out of your control—like mortgage rates or state taxes—one area where you can take the reins is your charitable giving strategy. If you’re charitably inclined and looking to maximize your tax savings, donating appreciated securities could be the smart move you’ve been searching for.
The Basics: Understanding Your Deductions
The tax code offers two main avenues for charitable donations: cash contributions and donations of appreciated assets, such as stocks, art, or even a valuable book collection. Each has its own rules and benefits; understanding these can help you make informed decisions about your philanthropic efforts.
Cash Contributions:
Cash donations are straightforward, but they come with a cap. For the 2024 tax year, the maximum deduction for cash contributions is 60% of your Adjusted Gross Income (AGI). For example, if your AGI is $1 million, you can deduct up to $600,000 in cash donations. It’s a significant opportunity, but what if you don’t have that much cash on hand?
Appreciated Securities:
This is where appreciated securities come into play. If you’ve held onto certain stocks for 10 years or more, their value today might be significantly higher than when you first purchased them. By donating these appreciated assets, you get a double tax benefit: you can deduct the fair market value of the securities (up to 30% of your AGI for public charities) and avoid paying capital gains tax on the appreciation. For a high-net-worth individual, this strategy can be a game-changer.
Public vs. Private Charities: Know the Difference
Not all charities are created equal in the eyes of the IRS, and this distinction affects your deduction limits.
- Public Charities: These are organizations that receive funding from the general public, such as large national nonprofits. When donating to a public charity, your deduction limit for appreciated securities is 30% of your AGI.
- Private Charities: Typically funded by a small group of individuals, private foundations have a lower deduction limit—20% of your AGI for appreciated securities. While these organizations might align more with your personal philanthropic goals, it’s essential to factor in these limits when planning your donations.
The Flexibility of Donor-Advised Funds
One of the most versatile tools in charitable giving is the Donor-Advised Fund (DAF). Think of it as a holding account for your charitable contributions. You can donate appreciated securities to a DAF before the end of the year to secure your tax deduction and then take your time deciding which charities will ultimately receive your gifts. This approach provides flexibility, allowing you to be strategic about your giving while still benefiting from the tax savings in the current year.
Why This Strategy Matters Now
The standard deduction has increased significantly due to recent changes in tax laws, including the Tax Cuts and Jobs Act (TCA). For many taxpayers, this makes itemizing deductions less common, but itemizing could still be worth it for those with more significant charitable contributions.
Donating appreciated securities is a compelling strategy because it allows you to control the timing and amount of your deductions. Unlike other deductions—such as mortgage interest or state and local taxes, which are often fixed—you have direct control over your charitable giving. This allows you to maximize your tax savings while supporting causes you care about.
Ready to Start the Conversation?
If you have a complex portfolio with multiple income streams, now is the time to start planning. The earlier you begin the conversation with your CPA, the better. Donating appreciated securities is a nuanced strategy, and the right approach depends on your overall financial picture, including your AGI, the types of assets you hold, and your philanthropic goals.
We can help calculate the savings and determine your optimal donation amount. Whether you’re considering donating stock, cash, or a combination of both, we can work with you to discuss the scenarios and identify the best strategy for maximizing your charitable impact and tax benefits.
Don’t wait until the last minute—start the conversation today, and let’s work together to maximize your charitable contributions.