Giving Stock or Cash? A Strategic Guide to Charitable Giving 

As we navigate the unpredictable economic landscape, many philanthropic clients face a daunting dilemma: should they prioritize preserving cash or leveraging their appreciated, publicly-traded stock or privately held stock to support their favorite charities? The answer lies in a nuanced understanding of the tax implications and strategic benefits of each approach. 

In recent years, the nonprofit sector has faced significant challenges, including turbulent economic conditions, inflation concerns, and potential tax changes. As a result, many donors are reevaluating their charitable giving habits, opting for more conservative financial decisions.  

Against this backdrop, it’s essential to engage with your clients about their charitable giving budgets for 2024 and beyond to explore the most effective ways to utilize their assets. This includes evaluating the types of assets that are best suited to give to charity, considering the current market conditions and tax implications. 

The case for cash: tax-deductible giving in uncertain times

In an uncertain economic climate, preserving cash may be a prudent decision for many clients. With interest rates and inflation on the rise, household finances may be more precarious than ever. In this scenario, donating cash to a charity or donor advised fund can be a more attractive option for clients who typically give regularly give cash to their favorite charities or their donor advised funds at Greater Houston Community Foundation (Foundation). Some donors can benefit from “bunching” gifts in one tax year to offset income and maximize deductions. 

The benefits of donating stock to charity

However, donating appreciated stock can be a highly effective tax strategy in any economy. By transferring long-term, marketable securities to a public charity or donor advised fund, clients may avoid capital gains tax and potentially enjoy an income tax deduction at the fair market value of the securities. This is a win-win for both the client and the charity. 

Furthermore, many clients may be holding long-term stock positions that have appreciated significantly since they purchased them. Even in a rocky stock market, not all stocks are down. By contributing these appreciated securities to a donor advised fund, clients can: 

• Potentially avoid capital gains tax on the sale of the securities. 

• May be eligible to enjoy an income tax deduction for the fair market value of the securities. 

• Removing the value of the stock from their estate 

• Support their favorite charities without reducing their cash reserves. 

IRS rules for donating stock to charity

If you want to maximize the tax benefits of charitable donations, you need a philanthropic advisor who intimately knows the IRS rules for donating stock. When your clients donate publicly traded stock that they’ve held for more than one year, they can generally deduct the full fair market value of the securities on the date of the gift, rather than their original cost basis. This is essentially what makes stock donations so powerful from a tax perspective.

The IRS has strict requirements that apply to stock donations. 

1. First, the stock must be transferred directly to the qualified charitable organization; if the donor sells the stock first and then donates the cash proceeds, they will owe capital gains taxes on any appreciation. 
2. Second, deductions for donations of appreciated stock are generally limited to 30% of the donor’s adjusted gross income (AGI), compared to the 60% AGI limit for cash donations. Any excess can, however, be carried forward for up to five additional tax years.

For privately held shares or other non-publicly traded securities, additional rules apply. For instance, donors must obtain a qualified appraisal for donations of non-cash property valued at more than $5,000, and the deduction is typically limited to the donor’s cost basis unless certain conditions are met. 

Donating appreciated stock to a donor advised fund

Donating appreciated stock to a donor advised fund can combine the tax advantages of stock donations with the flexibility and convenience of a DAF. When clients contribute long-term appreciated securities to their donor advised fund at Greater Houston Community Foundation, they receive an immediate income tax deduction for the full fair market value of the stock while avoiding capital gains taxes on the appreciation—regardless of when they ultimately recommend grants to their favorite charities.

Clients can time their contributions to maximize deductions during high-income years, while maintaining the ability to support nonprofits over time. The Community Foundation can assist with the liquidation of securities, so donors avoid the administrative burden of transferring stock directly to multiple charities. Additionally, the donated assets can be invested for potential tax-free growth while the donor considers which organizations to support.

Donor advised fund tax benefits can be extensive, and can make DAFs particularly attractive for clients who hold concentrated stock positions or are planning a liquidity event. By contributing appreciated shares before a sale, clients can potentially reduce their overall tax liability while building a charitable legacy. For clients with appreciated mutual fund shares or other publicly traded securities, the same principles apply—the key is making sure the assets have been held for more than one year to qualify for the full fair market value deduction.

Continue reading about other tax strategies in charitable giving

A strategic approach: benefits of donating cash

For clients whose portfolios are down significantly, contributing cash to a donor advised fund might be a more prudent approach than donating stock. Gifts of cash can: 

• Continue supporting their favorite charities even if a client’s personal stock may have dramatically fallen in value. 

• Give these positions more time to recover value and potentially contribute to a donor advised fund at a higher value in the future. 

• Result in a higher tax deduction for the client when they contribute these recovered stocks. 

Empowering philanthropic giving 

Navigating the complexities of charitable giving requires a thoughtful consideration of both options that giving cash or stock can provide. By understanding the tax implications and strategic benefits of each approach, you can empower your clients to make informed decisions that align with their philanthropic goals and financial priorities. 

The Foundation offers a range of giving options that will enable your clients to support the causes and organizations that matter most to them. Whether they are looking to support a specific cause or organization, leave a legacy for future generations, or find a way to give back in a way that makes sense for their unique situation, we’re here as your philanthropic partner. By choosing Greater Houston Community Foundation, your clients can trust that their philanthropic efforts will be supported by a dedicated team of experts who share their passion for making a positive impact in our community. 

Contact Kevin Pickett to learn more about how your client can make a lasting impact in the community by gifting cash or donating stock.   

More Helpful Articles by Greater Houston Community Foundation: 

• What is a Donor Advised Fund? The Complete Guide
• Rooted in Values: How Gifting Land Can Create Lasting Impact 
• What Are Qualified Charitable Distributions?
• The Power of Community: Why a Local Donor Advised Fund Tops Commercial Options 
• Wealth Preservation with Charitable Giving: The Generation-Skipping Transfer Tax

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