The power of giving the “right” asset to charity

Many people know they can donate appreciated marketable securities in lieu of cash to their favorite causes, but in the rush of year-end giving deadlines, they miss opportunities to give more efficiently. A similar opportunity for non-cash giving is available – but often missed – for those who own real estate and privately held business interests.

Key takeaways:

• Cash may be the worst asset you can give charitably.
• Charitable gifts of appreciated marketable securities are more efficient than cash, allowing you to give more to the charities you love to support.
• Charitable gifts of real estate and privately held businesses may offer the greatest opportunity to maximize your giving potential.

Heading needed here?

What is the single biggest mistake people make when it comes to planning their charitable giving? It is giving exclusively in the form of cash. When it comes to charitable giving, most people think about writing a check or dropping some cash in the Salvation Army’s red kettle at Christmas. This mindset can be unfortunate and costly. For two primary reasons, it is wise to find ways to give other types of non-cash assets.

First, when gifting marketable securities, real estate, and privately held business interests to a public charity, you may claim a fair market value deduction for the gift. If charity sells the gifted asset, then tax on the gain from that sale may be reduced or eliminated. These benefits enable you to give more to charity.

Second, non-cash assets are where the vast majority of people’s wealth resides. According to IRS statistics, of all giving done in the United States each year – more than $484.85 billion in 2021 – 75 percent of such gifts are simply made in the form of cash. That means only 25 percent of gifts are made in the form of non-cash assets. However, if we look at the cumulative composition of wealth owned by families, cash represents less than 10 percent. Therefore, much of the wealth comprising the other 90 percent is never even considered for charitable giving.

Why cash is not king

It can be argued that cash is the worst asset to give charitably. True, individuals generally receive a charitable income tax deduction, which may significantly reduce their tax liability. But certain types of appreciated non-cash assets – such as marketable securities, real estate, and privately owned businesses – may secure the same or similar charitable income tax deductions, preserve cash for additional giving, and minimize capital gains tax that would otherwise be triggered upon the sale of those assets.

A charitable gift of cash is eligible for a charitable income tax deduction up to 60 percent of a taxpayer’s adjusted gross income (AGI). This can be a very significant benefit and incentive for individuals to give charitably. For example, an individual can save up to 37 percent on cash contributions to charities for federal tax purposes and may save additional taxes at the state level. In high-income-tax states, the highest-income taxpayers may be paying up to 50 percent of their income in taxes.

In such situations, individuals essentially may be receiving a matching subsidy from the federal and state governments for their charitable contributions. For every dollar that individuals give, they can save a percentage of their income in taxes. So, practically speaking, when individuals in the 37% tax bracket give $1 and itemize deductions on their federal income tax returns, the federal government gives 37 cents in tax savings. Many states offer a similar benefit.

Our federal tax code and many state tax codes provide generous incentives and benefits to taxpayers who are generous.

However, even greater efficiencies can be secured by giving certain appreciated assets instead of cash. Most advisors and many individuals and families understand and have experienced the leveraged tax benefits of giving appreciated marketable securities in lieu of cash to charities.

The power of giving marketable securities to charity

Consider a taxpayer in the highest federal income tax bracket in a state with a five percent income tax rate – a 42 percent total tax rate. She’s considering making a $250,000 charitable gift in support of a charity building a hospital in Africa. If she simply writes a check for $250,000, she’ll save $105,000 in taxes. But she can do better than that!

Instead of writing a check, what if she selected $250,000-worth of highly appreciated stocks from a marketable securities portfolio, gave the stocks to charity, and then took the cash (which she otherwise would have given to charity) and reinvested it in marketable securities?

If the stocks selected were originally purchased for $100,000, upon their sale, she would recognize $150,000 in capital gains. Taxes owed upon sale would include a federal capital gains tax of 20 percent, a state income tax of 5 percent, and possibly the Medicare tax on net investment income of 3.8 percent, for a total tax rate of 28.8 percent. On $150,000 of gain, this amounts to a tax liability of $43,200.

However, because she gave the stock to charity, and allowed the charity to sell the stock, the $43,200 of taxes otherwise due goes to charity. Yet she would receive the same charitable income tax deduction of $250,000 as she would have by giving cash.

So, a $250,000 cash gift would have “cost” her $145,000 ($250,000 - $105,000 tax savings from the charitable income tax deduction). But a $250,000 gift of appreciated marketable securities would cost her only $101,800 ($250,000 - $105,000 tax savings from the charitable income tax deduction - $43,200 capital gains taxes). Charity gets $43,200 more because she gave stock instead of cash. It’s important to keep in mind that gifts of non-cash assets to public charities are deductible up to 30 percent of the giver’s adjusted gross income (AGI), compared to cash, which is deductible up to 60 percent of AGI. Gifts exceeding these thresholds may be carried forward to future tax years for up to five additional years.

Michael King

As Vice President, Charitable Wealth Strategist and attorney at NCF, Michael King works with generous families and their professional advisors, sharing concepts and strategies that allow them to maximize their giving.

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