Charitable Giving and Tax Efficiency: The Advantage of Donating Shares
Philanthropy and financial planning often go hand in hand. For individuals looking to support charitable causes while optimizing their tax situation, donating appreciated securities—such as publicly traded stocks, ETFs, or mutual funds—can offer a highly effective strategy.
Why Donating Shares Can Be More Tax-Efficient Than Cash
When you donate appreciated securities held for more than one year, you may be eligible to receive a charitable deduction for the full fair market value of the asset, while avoiding the capital gains tax that would have been incurred if you had sold the asset and donated the cash proceeds instead.
Let’s look at a simple example for someone in a 25% tax bracket who wants to donate $25,000 to a charity of choice. They can choose to donate that in cash, or do so in equity shares:
$25K Cash Donation:
Charitable deduction: $25,000
Federal income tax savings: $6,250 (25% of $25,000)
$25K Share Donation: Donate $25,000 in appreciated stock (cost basis $10,000)
Charitable deduction: $25,000
Federal income tax savings: $6,250 (25% of $25,000)
Capital gains tax avoided: $2,250 (15% of $15,000 unrealized gain)
Total tax benefit: $8,500
Donating shares allows you to maximize your giving potential, so you and your charitable cause of choice get the most benefit, especially as donations reach substantial amounts.
Key Considerations
Holding Period: To be eligible for the fair market value deduction, the donated securities must be held for over one year (i.e., long-term capital assets).
Qualified Organizations: Only contributions to IRS-recognized 501(c)(3) organizations are eligible for tax benefits.
AGI Limits: Charitable deductions for donations of appreciated securities are generally limited to 30% of your adjusted gross income (AGI). Excess amounts can often be carried forward for up to five years.
Valuation and Documentation: For gifts over $5,000, an independent appraisal may be required. Additionally, you must obtain a contemporaneous written acknowledgment from the charity for contributions over $250.
Effort: Donating shares requires more tax tracking and paperwork — for small amounts, this may not be worth your time.
Donor-Advised Funds (DAFs)
For those who wish to separate the timing of a tax deduction from the timing of actual charitable disbursements, donor-advised funds can be an attractive vehicle. You can contribute appreciated securities to a DAF, receive the tax deduction in the current year, and then recommend grants to charities over time.
Next Steps
If you are considering making a significant charitable contribution, especially using appreciated securities, it is essential to consult with your financial advisor or tax professional. They can help you determine:
Which assets are best suited for donation
The optimal timing based on your overall tax picture
How to align charitable giving with broader financial goals
By integrating charitable giving into your financial strategy, you can maximize the impact of your philanthropy while achieving greater tax efficiency.
This content is for informational purposes only and does not constitute legal or tax advice. Any numbers and estimates are hypothetical. Please consult your advisor before making any financial decisions.
