Getting Smart About Charitable Donations

November 30, 2023

It’s the time of year when many charities approach their supporters for end-of-year donations. If you plan on making year-end charitable donations, there are ways to do it that will not only support a worthwhile cause, but also magnify the benefit your tax situation.

One option is to make a Qualified Charitable Distribution, or QCD. If you need to take a required minimum distribution (RMD) from a traditional IRA, and you’re at least 70 ½ years old, you can donate a portion of your required minimum distribution to a 501(c)(3) organization through a direct gift from your IRA. However, some restrictions apply. For example, QCDs are limited to $100,000 per year for each eligible tax payer. If you are married and filing jointly, both spouses can contribute up to $100,000 per year from their respective IRAs. Private foundations, supporting organizations, and donor-advised funds are not eligible for QCDs.

The beautiful things about QCDs is that they satisfy your RMD requirement, but are not included as taxable income on your annual tax return. If you are on Medicare, using a QCD could help you avoid higher IRMAA income brackets, saving hundreds of dollars each month on your Medicare Part B & Part D premiums.

Another option is to donate appreciated property instead of cash. Most commonly, this involves donating appreciated shares of common stock, mutual funds, or exchange-traded funds. Here is how it works.

When you give stock to someone, including a charity, your original cost basis transfers to the recipient. If the recipient is tax-exempt, it can sell donated shares without paying tax on capital gains while you, as the donor, get a tax deduction equal to the full-market value of the donated stock and never have to pay taxes on the capital gains. It is a pure win/win situation. If you really like the stock and want to maintain your position, you can immediately replace your donated shares by using the cash you would have otherwise donated to charity to buy shares in the market. The end result is a portfolio that is just as it was before the donation, but without any embedded capital gains.

For this strategy to work properly, you need to follow three important rules:

  1. Your donation must be to a qualified non-profit, and that non-profit must provide you with a “contemporaneous written acknowledgement” of your donation. The acknowledgement must include 1) a description of the donated property, 2) a declaration of whether you received any goods or services in exchange for your donation, and 3) an estimate of the donation value. Without this statement, you will not be able to deduct your donation.
  2. Donate stock only if it has appreciated in value. The benefit to the strategy comes from avoiding tax on the capital gain. If the stock trades at a loss, you would be better off selling the stock and donating cash proceeds from the sale. You can still deduct the charitable contribution from your taxes and you will be able to use the realized capital loss to offset future capital gains.
  3. Donate stock only if you’ve held it for longer than one year. If you donate stock held for less than one year, the IRS limits your charitable deduction to your cost basis in the stock, not its full market value. Your financial advisor should be able to help you identify which of your stocks are prime candidates for charitable donations.

The IRS allows the donation of other types of property, but the rules governing tax deductions may differ depending on the kind of property involved. For a complete rundown, check out IRS Publication 526: Charitable Contributions. Get it online at www.IRS.gov.

Some additional caveats to keep in mind: Different charities may have different procedures for accepting donations of appreciated property, so you will want to work closely with them. Not all non-profits are in a position to accept all types of assets, though most can accept appreciated stock. If you have other assets you want to donate, consider working with The Community Foundation for Monterey County. They can accept donations from a broad array of asset types including, cash, stock, real estate, collectibles, and even oil and gas rights. Some property donations can take time to process, so don’t wait until the last minute.


Please see important disclosure information here.

Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to steve@montereypw.com.