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Maximizing Charitable Impact: A Win-Win Strategy for Donors and Charities

AInvestTuesday, Dec 3, 2024 9:56 am ET
2min read


In the realm of charitable giving, donors often seek ways to maximize their impact while minimizing their tax burden. A strategic approach to charitable donations, as recommended by financial advisors, can achieve this goal by leveraging appreciated securities and the 5-year carryover rule. This strategy, while beneficial for donors and recipient charities, may not be popular with the IRS due to reduced tax revenue.

Donating appreciated securities, such as stocks or mutual funds, can offer tax advantages for donors. When securities have increased in value, selling them would trigger capital gains tax. However, donating the securities directly to a charity allows donors to avoid these taxes while still receiving a charitable deduction equal to the fair market value of the securities. For example, if a donor wants to give $10,000, they could donate $10,000 in cash or securities worth $10,000 that have appreciated. In the latter case, the donor wouldn't pay capital gains tax and would still receive a charitable deduction, effectively giving more to the charity while paying less in taxes.

Charities also benefit from receiving appreciated securities instead of cash donations. Firstly, donors receive a fair market value deduction for the securities, reducing their taxable income. This is particularly advantageous for high-income donors who face higher capital gains tax rates. Secondly, charities avoid capital gains tax when selling the appreciated securities, as they are tax-exempt organizations. Lastly, the charity can sell the securities without incurring the capital gains tax, allowing them to reinvest the full amount, potentially generating more income for their cause.

Another strategy to manage tax liabilities over time is the 5-year carryover rule for charitable deductions. This rule allows donors to carry forward excess deductions above annual limits for up to five years. This strategy enables donors to optimize their tax situation, potentially reducing their overall tax burden and maximizing their charitable giving. By combining this strategy with donating appreciated securities, donors can align their financial goals with their philanthropic aspirations, making it a win-win situation for both parties, except for the IRS, which may receive less tax revenue.

One way to maximize the benefits of the 5-year carryover rule is to "bunch" charitable contributions. This involves making larger-than-normal donations in one year to maximize tax benefits. By bunching contributions, donors can increase their itemized deductions and lower their taxable income. For example, if a donor normally donates $1,000 to charity each year, by bunching and donating $2,000 in one year, they can potentially save hundreds or even thousands of dollars in taxes. However, donors should consider their financial situation and ensure the charity they donate to is qualified before implementing this strategy.

In conclusion, donating appreciated securities and leveraging the 5-year carryover rule for charitable deductions can help donors better align their financial and philanthropic goals while maximizing the impact of their donations. Charities also benefit from receiving securities and having donors make larger, more strategic contributions. While this strategy may not be popular with the IRS, it offers a legal and effective way for donors to optimize their giving while minimizing their tax burden. As always, it is essential to consult with a financial advisor when implementing these strategies to ensure they align with your specific financial situation and goals.
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