Noncash Charitable Contributions for Tax-Smart Giving
Giving to a public nonprofit may traditionally involve writing a check, but more donors these days maximize their giving with illiquid assets. From July 2023 to June 2024, these noncash charitable contributions made up 63% of assets transferred to donor-advised fund (DAF) accounts at DAFgiving360™.
Donated property with high appreciation can often be more helpful for both the charitable organization and the donor. And if you are philanthropically minded and have accumulated significant gains from investments, this strategy could make sense. Here's how it works.
Focus on high-value, low cost basis investments
Selling significantly appreciated assets—whether it's real estate, securities, cryptocurrency or more unique types of property like private business interest, collectibles, and equity compensation—can generate large capital gains. But if philanthropy is part of your overall plan and you itemize deductions on your federal taxes, donating a long-term capital asset to charity can allow you to enjoy a double tax advantage:
- You can potentially eliminate the capital gains tax you would owe if you sold the asset.
- You may deduct your donation (subject to applicable limitations) based on the asset's fair market value.
In addition, the possible elimination of capital gains tax on the sale of an asset can also increase your donation amount to the nonprofit. (See below.) Because they are tax-exempt organizations, 501(c)(3) nonprofits can then sell these assets without any tax consequences.
While tax benefits should not be the primary consideration for charitable giving, they are part of the equation—especially when it involves illiquid assets with a very low cost basis. A good philanthropy strategy addresses the overall impact on the donor as well as the recipient of a gift.
Minimize taxes, maximize impact
A direct charitable gift of appreciated stock with an original cost basis of $50,000 and a fair market value of $1 million could save you more on taxes and increase your giving capacity compared to selling the stock and donating the proceeds.
| Category | Sell stock and donate after-tax proceeds | Donate stock directly to a nonprofit |
|---|---|---|
| Long-term capital gains taxes | $190,000 ($950,000 x 0.20) | $0 |
| Charitable gift and tax deduction | $810,000 ($1,000,000 – $190,000) | $1,000,000 |
| Tax savings | $109,700 ($810,000 x 0.37 – $190,000) | $370,000 ($1,000,000 x 0.37) |
Disclosure
This hypothetical example is for illustrative purposes only. The example assumes an original cost basis for the stock of $50,000 and federal long-term capital gains tax rate of 20%, and an adjusted gross income of $4 million. This example does not take into account any state or local taxes or the Medicare net investment income tax. The tax savings shown is the tax deduction multiplied by the donor's income tax rate of 37%, minus the long-term capital gains taxes paid.
To receive this double tax advantage, you must have held the asset for more than a year before donating it. Keep in mind that, in most cases, the IRS generally limits deductions for long-term noncash donations to 30% of your adjusted gross income (AGI), versus 60% of AGI for cash donations.
However, if your donation exceeds the deduction limit in a single tax year, you may be able to carry over and use the excess amount in your tax return over the next 5 years, subject to the AGI limitations each year. It's a good to examine your giving holistically within your wealth management plan and work with your wealth advisor or a tax professional to understand how it fits your goals.
All assets are not treated the same
Generally speaking, an individual can donate almost anything. The question for donors to consider is whether a gift ultimately helps the nonprofit and aligns with the donor's wealth management objectives.
Many charities are not equipped to handle the complexities of non-publicly traded and illiquid assets like private businesses, cryptocurrency, certain types of stock, or collectibles, to name a few. Nonprofits are more focused on fulfilling their charitable missions and may not frequently deal with the valuation and liquidation of contributed assets. If an asset is not marketable and a charity can't sell it quickly or without expending significant resources, it may not be the best gift.
In addition, special rules apply to certain types of assets that may limit their value or transferability. Art and collectibles, for example, are subject to the IRS' "related use" rule; generally, if you donate these assets to a charity that doesn't use them to fulfill its mission, your deduction may be the lesser of the original value or the fair market value of donated property. Noncash gifts can involve very complicated analysis, so it’s important to consult your tax or legal advisor.
Consider a sophisticated approach
One efficient way to lessen the burden of an illiquid gift on a prospective charity is to open an account with a donor-advised fund (DAF). Many DAFs, including DAFgiving360, have resources to help you assess whether a noncash gift might satisfy your goals.
A donor-advised fund like DAFgiving360 is a 501(c)(3) public charity, so donors enjoy the tax advantages of donating noncash assets when they make an irrevocable asset transfer to it. DAFs generally have more resources than the average nonprofit to evaluate, receive, process, and liquidate assets. Once the funds from the sale of an asset are in a DAF account, a donor can make cash grant recommendations to the public charities of their choice. Additionally, when you give via a DAF account, your contributions can be invested for potential growth that's tax-free.
Noncash contributions to charity don't have to be onerous. Using a DAF not only simplifies the process, but also opens the doors to continue expanding your charitable legacy.
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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Investing involves risk, including loss of principal.
The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.
DAFgiving360™ is the name used for the combined programs and services of Donor Advised Charitable Giving, Inc., an independent nonprofit organization which has entered into service agreements with certain subsidiaries of The Charles Schwab Corporation. DAFgiving360 is a tax-exempt public charity as described in Sections 501(c)(3), 509(a)(1), and 170(b)(1)(A)(vi) of the Internal Revenue Code.
Contributions made to DAFgiving360 are considered an irrevocable gift and are not refundable. Once contributed, DAFgiving360 has exclusive legal control over the contributed assets.
Contributions of certain real estate, private equity, or other illiquid assets may be accepted via a charitable intermediary, with proceeds transferred to a donor-advised fund (DAF) account upon liquidation. Call DAFgiving360 for more information at 800-746-6216.
A donor's ability to claim itemized deductions is subject to a variety of limitations depending on the donor's specific tax situation. Consult a tax advisor for more information.
Market fluctuations may cause the value of investment fund shares held in a donor-advised fund (DAF) account to be worth more or less than the value of the original contribution to the funds.