Is It Better To Donate Cash Or Stock?
As the 2021 year comes to a close, many generous individuals and families plan to gift funds to various charitable organizations. The following benefits to consider include donations of appreciated stock and cash through both direct contributions and bunching gifts into a fund. Next week, we will cover the topic of Qualified Charitable Distributions (QCDs).
Charitable Gifts Are Tax-Deductible
Gifts to a qualified charitable organization may entitle you to a charitable contribution deduction against your income tax. For 2021, there is an above-the-line deduction for charitable donations of $300 for single filers and $600 for married couples. Additionally, if you itemize deductions, you can take a charitable deduction if your total deductions are greater than the standard deduction. To count for 2021, charitable donations must be made by the end of the year, but the deadlines for types of contributions may vary based on your custodian.
Donate Cash To Receive 100% Of AGI Deduction
According to the Internal Revenue Service, taxpayers "who itemize may generally claim a deduction for charitable contributions made to qualifying charitable organizations." In the prior years, these deduction limits ranged from 20% to 60% of adjusted gross income (AGI) and varied based on the type of charity and contribution method. Previously, cash contributions made to a qualifying public charity were generally limited to 60% of the taxpayer's AGI. However, qualified contributions made during the 2021 calendar year are deductible up to 100% of AGI. Excess contributions are still eligible to be carried forward for up to five tax years.
Consider Gifting Appreciated Stock Instead of Cash
Cash and stock gifts both allow taxpayers to take a charitable income tax deduction. But, with a donation of long-term appreciated stock to a charitable organization, you receive an additional tax benefit because you avoid paying tax on your stock's "built-in" capital gains. For example, if you were to sell appreciated stock, you would have to pay capital gains tax, typically ranging from 15% - 20% (as of this writing), depending on your income. However, if you were to gift the stock directly to a non-profit organization, you could avoid the capital gains tax altogether and earn the tax deduction for the donation. Even better, your charity can sell the stock without having to pay capital gains tax.
Bunching Donations Into A Donor-Advised Fund
For those taxpayers who make annual charitable contributions but are short of the standard deduction, a donor-advised fund (DAF) may be a more tax-advantaged strategy while continuing to support their charitable causes with yearly gifts.
For example, let's say "Ginny," a single individual, has $12,500 of itemized deductions, including $8,000 in donations to charity in 2021. That amount is just below the $12,550 standard deduction in 2021 and the $12,950 standard deduction in 2022. So, she will take the standard deduction each year, and over two years, she will claim a total of $25,500 in standard deductions.
Instead, Ginny decided this year to take a more tax-advantaged approach. Rather than donating $8,000 to charity for the next three years, Ginny decides to bunch three years of charitable donations into a single year. The bunched giving creates $28,000 in itemized deductions in 2021, and she will take the standard deductions in 2022 and 2023. With this option, Ginny gained $15,450 of additional tax deductions over the next three years.
|Total Three-Year Deduction with Bunching|
|Total Three-Year Standard Deduction
|Deductible amount gained by bunching|
*The IRS has not yet announced the standard deduction amount for 2023, for this illustration, we assume that the standard deduction remains at $12,950.
If you are unsure about the best gift method for your tax situation, please feel free to reach out to Hurlow Wealth Management Group. Our financial advisors have helped clients plan charitable giving strategies for nearly two decades. Click here to schedule an introductory call to see if our services are right for you.
If you would like to know more about this topic, we encourage you to watch the recorded webinar from Tuesday, December 14, 2021, Make An Impact With Strategic Philanthropy.