Thinking beyond cash: Smart strategies for charitable donations

Charitable giving isn’t just about generosity—it’s also about savvy tax planning. When Ruth L. Gottesman donated $1B of Berkshire Hathaway stock to the Bronx Albert Einstein College of Medicine, she not only gave all the current and future students an amazing gift, but she also avoided having to pay $400M in taxes by giving it to charity. Let’s delve into some smart strategies for maximizing the benefits of your charitable contributions, both for you and the charity receiving them.

• Consider bunching donations in one year to maximize itemized deductions one year, and utilize the standard deduction.
• Think beyond cash; donations can be made of any asset from crypto, stock, and artwork.
• Keeping accurate, dated records is key.

The amount of Adjusted Gross Income (AGI) you can donate to charity to offset tax liabilities varies depending on what you donate and who the recipient is.

• Cash – 60% is allowable if it goes to public charities and other qualified organizations, including Donor Advised Funds (DAFs), or 30% if it goes to a Private Foundation.
• Non-Cash (non-appreciated), think clothing and household items to goodwill – 50% if it goes to public charities and other qualified organizations, including DAFs or 30% if it goes to a Private foundation.
• Appreciated Assets (stock or artwork that has increased in value) – 30% if it goes to public charities and other qualified organizations, including DAFs, or 20% if it goes to Private Foundations.

If your income varies year over year, you may want to consider bunching 2 to 3 years’ worth of planned donations into a year where your income is pushing you into a higher tax bracket. This enables you to maximize itemized deductions in high-income years and allows you to utilize the standard deduction in others. A Donor Advised Fund (DAF) makes bunching easier and allows you to take a charitable donation in the year donated but disperse the funds on your timeline to desired organizations. Using a DAF also means you can ensure that your gift is used towards something you strongly support over a greater time. Potentially, those funds could be provided to a charity over several years while you take the deduction in one year.

How it breaks down:

Married Filing Jointly in the top tax bracket of 37%; they have no deductions other than charitable donations.  Using 2024 rates.

You donate 15K per year for 3 years

• You can either take the standard deduction or itemized deduction in this case the $15K donation is below the standard deduction of $29.2K so it is tax advantageous to just utilize the standard deduction in each year.
• Year 1 – $29.2K IRS standard deduction
• Year 2 – $29.2K IRS standard deduction
• Year 3 – $29.2K IRS standard deduction
• Giving a total deduction value over 3 years of $87.6K
• $87.6K x tax rate of 37% is $32.4K in tax savings from the standard deduction over 3 years

You donate all 45K in year 1‍

• Year 1 – $45K charitable donation which exceeds the standardized deduction so this will be an itemized deduction of the full amount of $45K
• Year 2 – $29.2K IRS standard deduction
• Year 3 – $29.2K IRS standard deduction
• Giving a total deduction value over 3 years of $103.4K
• $103.4K x tax rate of 37% = $38.3K in tax savings
• Resulting in an additional $5.9K in tax savings merely by smartly timing charitable donations

Donations beyond cash to consider: 

Appreciated Securities

Directly donating appreciated securities held for over a year allows you to deduct their Full Market Value (FMV) on the date of donation – the average of the high or low stock price on that day of donation, effectively avoiding taxes on the appreciation. This allows you to benefit from the stock’s appreciation for donation purposes without having to pay tax on the appreciation. The more the stock has appreciated, the larger the effective benefit.

Publicly traded securities don’t require an appraisal, but non-publicly traded assets like privately held C-corp stock, S-corp stock, and LLC interests do. Other considerations may also apply. Donating to a public charity or DAF allows you to take a larger deduction relative to your AGI.

How it breaks down:

Projected $1.2M in ordinary income for the year. Stock in a given company has appreciated 80% to a worth of $300K (held for longer than 1 year), and you want to donate $300K to a qualified charity

You sell the stock and donate the proceeds to the charity. 

• $300K @ 80% = appreciation of $240K
• Will trigger an additional $240K of taxable income under capital gains
• $240K X 23.8% (for top capital gains tax rate and net investment income tax) = $57.1K
• Charitable donations reduce your ordinary income first, so when you donate $300K in cash
  • $300K x $37% = $111K
  • $111K – $57.1K (in tax paid) = $53.9K in net tax savings

You don’t sell the stock but donate it directly to a qualified charity. 

• Net income stays at $1.2M
• Able to take the full $300K as a deduction
• Charitable donations reduce your ordinary income first, so when you donate the appreciated stock
  • $300K x $37% = $111K in net tax savings (an increase in $57.1K savings over the above scenario)

Artwork

Sick of staring at that Jackson Pollock? If you’re considering donating artwork, be aware of the related-use rule, which applies when a charity makes use of the property in a format consistent with its exempt purpose, for example, a library making use of a rare book. If your artwork meets this criterion, your deduction is based on its fair market value (FMV) as long as it’s been held for more than 1 year. However, failing this rule means your deduction is limited to the cost basis. Donating to a public charity or Donor-Advised Fund (DAF) provides a higher adjusted gross income (AGI) limit and a more significant deduction.

To ensure you have the right documentation, obtain a contemporaneous acknowledgment letter for donations over $250 and an appraisal for those over $5,000. A charity must agree to keep the work for at least 3 years, and you will need to secure a promise note stating they will do this. If the charity sells before the 3 years are up, the donation reverts back to cost basis rather than FMV.

Be aware that artwork is hard to sell, often ending up selling at a loss at auction. But keeping it in the event of your death can incur high estate taxes for your beneficiaries. So, donating artwork is a wise strategy when it comes to estate planning, as it can reduce your taxable estate and provide liquidity for your beneficiaries.

And sorry, art dealers and artists cannot take a deduction.

Cryptocurrency

Cryptocurrency donations to tax-exempt organizations who accept it are gaining popularity. Appraisals are necessary for donations exceeding $5,000. Consider exploring Philanthropic Decentralized Autonomous Organizations (DAOs) for innovative giving opportunities.

Bottom Line

Understand the AGI limitations based on the property donated and the recipient. Keep meticulous records and obtain written acknowledgment letters, ensuring no goods or services were exchanged for your donation. For non-cash donations over $500, file Form 8283.

Any tax advice herein is not intended or written to be used.