If there are any causes or communities dear to your heart, donating to support that group may be a top priority in your life. But when it comes to making the biggest possible impact with your generosity, there may be better ways to include charitable giving in your estate planning than simply giving cash.
Instead, donating an appreciated asset may be the savvier financial move to minimize your tax liability, particularly when it comes to offsetting capital gains tax.
Can charitable donations offset capital gains and minimize your taxes? While you will want to discuss the finer details with a CPA, here are some of the basics to get you thinking about whether a charitable donation is right for you.
Can Charitable Donations Offset Capital Gains?
One financial move you can make to offset capital gains tax liability is donating some of your assets to charity.
When you contribute long-term appreciated assets to the charity of your choice, two key things happen: It reduces your income taxes by the fair market value of the asset and it minimizes capital gains taxes by twenty percent or more, depending on your state.
You can donate any number of appreciated assets (meaning those that you have held for a year or more), including stocks. At this point, you can deduct the full fair market value of your assets from your adjusted gross income. Plus, don’t forget about the elimination of your capital gains tax which could seriously eat into the value of your investments.
To capitalize on these tax benefits, you may want to donate the assets to a donor-advised fund in lieu of selling your assets and simply donating the proceeds.
Why use a donor-advised fund to make donations to your charity of choice? The first reason many people consider a DAF is because it has a higher tax deduction than simply giving money to any private foundation. Instead of a twenty percent tax deduction, you can take advantage of a thirty percent tax deduction of your adjusted gross income.
Plus, you get the benefit of avoiding capital gains tax, leaving you with more money to donate to your favorite charity. If you had simply sold the asset and decided to bear the taxes, your gift may not have gone as far as it could have in a donor-advised fund.
Other vehicles for charitable donations, such as charitable remainder trusts, can provide similar tax advantages that maximize the outcome for both you and your charity (or charities). Check out our related blog for a breakdown of donor-advised funds vs charitable trusts.
Limitations and Considerations
Of course, there are some limitations to donating appreciated assets to charity. You may find that there are times when charitable donations are not the right fit for your tax liability. These get into the finer details that you will want to discuss with your CPA or tax professional.
Here are some top considerations to take under advisement when donating.
Itemized vs Standard Deduction
How are you going to file your taxes in April? Deciding between your filing status of itemized or standard deductions is key to maximizing charitable giving. The IRS gives individuals a standard deduction of $14,600 for 2024 ($29,200 for married couples filing jointly and $21,900 for heads of household).
The question is: will you be donating more than this value to charity?
If you intend to donate appreciated assets that have a value greater than the standard deduction, you may want to itemize your taxes. You have to choose one or the other, so carefully evaluate your situation with a tax professional. Itemizing significant deductions could lower your overall tax bill.
This means that you will need to keep receipts and clear, detailed records throughout the year. Without knowing exactly how much you contributed or where you spent tax-deductible money, it will be difficult to decide whether an itemized deduction is right for you.
Confer with your tax professional to learn more about what records you may need to keep to itemize all your deductions. Keep in mind that charitable donations are not the only form of deduction you can take. You can also itemize mortgage interest, medical expenses, and more.
Take a holistic look at your financial situation to see which is right for you.
Charitable Contribution Deduction Limits
There’s a ceiling on how much you can donate to charity each year while taking the deductions on your adjusted gross income. For both 2023 and 2024, the cap is sixty percent of your adjusted gross income for cash contributions.
However, this is for cash donations and is slightly adjusted for long-term appreciated assets. When you contribute some of these assets to charity, you will see a threshold of just thirty percent of your adjusted gross income. Potential deductions are based on the fair market value of the asset.
It should also be noted that the contributions must be made to a qualified organization. This may mean you cannot donate to a brand-new charity that has not yet received its status from the IRS as a qualified charity. In other words, your aunt keeping 10 cats in her house doesn't qualify.
You can search for tax-exempt organizations using the IRS search tool to determine if your desired charity will qualify you to take a deduction.
Create a Charitable Impact with Magellan
When you’re ready to tackle the financial planning that will impact your legacy for years to come, reach out to the team at Magellan Planning Group.
If you’ve been thinking about making a significant donation to a charity near and dear to you, allow us to help you maximize your gift. We provide comprehensive estate, financial, legal, and tax planning all under one convenient roof and can help you navigate the nuances of donating appreciated assets, real estate, and more using the charitable vehicle of your choice.
Reach out to us today to learn more about our services and see if Magellan is the right fit for you!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.
Such trusts are used to develop a vehicle for donations to a favorite charity, which also allows for the reduction of income taxes through a charitable deduction and
favorable tax treatment at the date of the gift by non-recognition of built-in capital gains. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.
Generally, a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor's representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account. Donors take a tax deduction for all contributions at the time they are made, even though the money may not be dispersed to a charity until much later.