I’m frequently asked whether it’s better to donate cash, stocks, or make a Qualified Charitable Distribution (QCD) from an IRA, and the answer can have a huge impact on both your tax savings and the effectiveness of your gift. While charitable giving is a meaningful way to support the causes you care about, not all donations are created equal - especially when it comes to taxes. It’s crucial to understand the rules and benefits of each type of donation, as the wrong choice could cost you thousands in missed tax savings and lessen the impact of your generosity.
In this post, I’ll break down the essentials of charitable contributions, explain deduction limits based on the type of asset you donate, and provide a side-by-side comparison of how each option affects your taxes. Be sure to read until the end to find out which strategy comes out on top!
Charitable Contributions and Tax Issues
When making charitable donations during your lifetime, it's important to be aware of the various tax rules involved. Firstly, charitable gifts are exempt from gift tax, allowing you to give directly to charities without worrying about gift tax limits. Secondly, the IRS provides income tax deductions for donations to qualified organizations, but the deduction amount and its limits vary based on the type of asset donated, the type of charity, and your Adjusted Gross Income (AGI). Different assets, like cash, stocks, real estate, and personal property, have unique tax consequences.
Types of Qualifying Organizations
To be tax-deductible, your donation should go to a qualifying organization recognized by the IRS under Section 501(c)(3) or other eligible entities:
Public Charities: Organizations like religious groups, schools, and hospitals. Cash donations are generally deductible up to 50% of your AGI (temporarily 60% from 2018 to 2025).
Private Foundations are often funded by a single source and mainly give grants to other charities, also qualify but usually come with lower deduction limits.
Other Organizations: Veterans' groups and fraternal societies may qualify for deductions in specific situations.
Adjusted Gross Income Limitations
The amount you can deduct for charitable donations depends on your AGI. For 2024, the deduction limits are set at 20%, 30%, 50%, or 60% of your AGI.
Cash to 60% Limit Organizations (previously 50% before the Tax Cuts and Jobs Act): Cash donations to public charities, certain private operating foundations, and some government entities can be deducted up to 60% of your AGI. Be aware of that if the Tax Cuts and Jobs Act (TCJA) expires in 2025, this limit will go back to 50% in 2026.
Capital Gain Property to 50% Organizations (30% AGI Limit): If you donate appreciated property like stocks, real estate, or collectibles to 50% limit. organizations, the deduction is generally limited to 30% of AGI. This encourages donors to contribute assets that have appreciated significantly, providing a double tax benefit - avoiding capital gains tax and receiving a deduction based on the fair market value.
Alternatively, you can choose to deduct based on the asset’s original purchase price (adjusted basis) rather than its current market value. This allows you to use a 60% AGI limit instead of 30%.
So, you have two options: deduct the full market value with a 30% AGI limit or use the adjusted basis for a 60% AGI limit.
For example, let's say you own a stock purchased for $10,000 (adjusted basis) that is now worth $25,000 (fair market value), and your AGI is $100,000. If you donate the stock and use its current value ($25,000) as the deduction, you can deduct up to 30% of your AGI, or $30,000.
Non-50% Limit Organizations (30% AGI Limit): Donations to private non-operating foundations, veterans' groups, and other specific entities have a 30% AGI limit, whether you donate cash or appreciated property. This stricter limit is due to the IRS's concern that these types of donations have a higher risk of abuse or manipulation.
Non-Cash, Non-Capital Gains Donations to 50% Organizations (50% AGI Limit): Donations of property other than cash or capital gain property, like clothing, household goods, food, or vehicles are subject to a 50% AGI limit. This means you can deduct up to 50% of your AGI for these types of non-cash, non-capital gain contributions.
Non-50% Limit Organizations (20% AGI Limit): If you donate certain types of assets, like appreciated property, to private non-operating foundations, the deduction limit is lowered to 20% of your AGI.
Deciding Whether to Donate Cash, Stocks, or QCDs
When making charitable gifts, it’s also crucial to think about the type of property you are donating. Going back to the initial question of whether to give cash, securities, or use QCDs, each option comes with its own unique tax advantages and factors to consider.
Cash Donations
Simple and straightforward, cash donations are fully deductible up to 60% of your AGI in 2024 (50% before TCJA). This is often the easiest type of donation, but it might not provide the most significant tax advantage compared to other types of gifts.
Donating cash is generally most advantageous when you need to quickly reduce your taxable income.
Your deduction amount is the actual cash amount donated.
Capital Gain Property Donation
When donating property, it’s important to understand the type of asset - whether it's ordinary income property, capital gain property, or Section 1231 property - as this affects how much of your charitable contribution is deductible.
Ordinary Income Property refers to assets that, if sold, would generate ordinary income instead of a capital gain. This category typically includes:
Business inventory.
Artwork created by the donor.
Short-term capital gain property (assets held for a year or less).
Stock-in-trade or other property primarily held for sale to customers.
If you donate ordinary income property to a qualified charity, your deduction is limited to the lower of the property’s fair market value (FMV) or its adjusted basis (usually the cost basis).
Example of Deduction Calculation for Ordinary Income Property
Imagine you own a business and donate inventory valued at $10,000 to a charity, with a cost basis of $6,000. Since this is considered ordinary income property, your deduction is capped at the lesser of the FMV ($10,000) or the cost basis ($6,000). Therefore, you can only deduct $6,000 on your tax return.
Capital Gain Property includes assets that would result in a long-term capital gain or Section 1231 gain if sold. Common examples are:
Stocks, bonds, or mutual funds held for more than one year.
Investment real estate (not held primarily for sale).
Art, antiques, and collectibles held for more than one year.
Donating capital gain property offers a double tax advantage: you can deduct the property's fair market value if you’ve held it for over a year, and you avoid paying capital gains tax that would apply if you sold the asset. This makes it one of the most tax-efficient donation strategies.
For example, if you donate stock worth $20,000 that you originally purchased for $5,000, you could save $2,250 in capital gains taxes if you fall into the 15% long-term capital gains tax bracket.
Qualified Charitable Distributions
For individuals aged 70½ or older, QCDs from an IRA can be a tax-smart way to give. In 2024, QCDs up to $105,000 per year can be excluded from taxable income and count toward your required minimum distribution. This is particularly advantageous for those who don’t itemize deductions. By making a QCD, the donor not only reduces their taxable income but also potentially lowers their Medicare premiums and exposure to the Medicare surtax.
Side-by-Side Comparison
Let’s dive into a comparison of how various donation types - cash, securities, or a QCD - can affect both tax savings and the effectiveness of charitable giving for a couple named John and Jane.
These examples show that the type of asset you choose to donate can have a significant impact on your overall tax savings and charitable impact.
From a tax standpoint, donating appreciated securities or making a QCD from an IRA can often provide the most significant benefits. As we’ve seen, donating appreciated property can maximize the deduction and minimize capital gains while QCDs can lower your taxable income directly, which can be especially beneficial for those in higher tax brackets, those who don’t itemize deductions, or seeking to avoid Medicare premium surcharges.
Final Thoughts
Knowing how these strategies work enables you to make more impactful charitable donations while optimizing your tax savings. Remember, the difference in tax treatment could mean thousands of dollars in potential savings or missed opportunities. Make your charitable giving count by choosing wisely.
If you want to create a lasting legacy and support the charitable causes you care about, feel free to book an estate clarity meeting with us. We’ll help you explore your charitable giving strategy and determine which giving vehicles best align with your goals.
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