Smarter Charitable Donations

Good Morning Relaxing Retirement Member,

Now that we are into the final quarter of 2019, where the overwhelming majority of donations are made to charities, it’s time to strategically think about “how” you are going to donate.

As requests for donations come in the mail, many of us feverishly write out checks to our charities and non-profit organizations of choice, and of course, our alma mater.

Before you write out that first check, take a moment to consider two important strategies.  The first is available to anyone who has appreciated investments held outside of IRAs.

The second is only available once you have reached age 70 ½ and are required to withdraw funds annually from your IRA.

Let’s begin today with the first strategy which is available to everyone regardless of age.

Strategy #1: Donating Shares vs. Cash

As we have discussed on many occasions, any gain realized when selling shares of an investment held outside of IRAs is subject to capital gains taxes.

However, when you donate shares of these appreciated investments, as opposed to donating cash, you can avoid these capital gains and potentially make a bigger charitable donation.

Essentially, you can sell shares of an appreciated investment, pay the capital gains tax, and then donate the proceeds to charity.

Or, you can donate the shares directly to the charity prior to selling them.

Let’s walk through a quick example of someone in the 32% federal tax bracket making a $10,000 donation.

Sell Your Shares and Donate the Proceeds

Let’s assume the investment you purchased years ago for $4,000 is now worth $10,000.  If you sold it, $6,000 would be subject to capital gains tax.

At a combined federal and state capital gains tax rate of 25%, you would owe $1,500 in taxes, thus netting you out at $8,500 after taxes.

Assuming you then donated the $8,500 proceeds to charity, the charity would receive $8,500, and your federal income tax savings on your donation would be $2,720 (32% bracket).

Donate Your Shares

As an alternative, if you donated the full market value of your shares to charity directly, $10,000, your tax savings on your donation would be $3,200 (32% tax bracket).

And, your charity would receive $10,000 instead of $8,500.

The key component of this is your charity of choice does not pay capital gains tax when they sell your shares because charities don’t pay taxes.


The mechanics of this are actually quite simple.  You have two options:

  1. Ask your charity of choice for their gifting instructions for donating securities (Account custodian, Account number, DTC number, etc.). All sizable charitable organizations have brokerage accounts which receive charitable donations of shares.

    Provide these written instructions to your account custodian, i.e. Charles Schwab, and designate the holding you wish to donate and the number of shares.

    You would then receive a receipt indicating the fair market value of the donated shares to use for income tax return preparation.

  1. The second option, which I have personally implemented, is to donate these appreciated shares to a charitable fund. Once you donate your appreciated shares to this separately designated fund, you qualify for the charitable deduction.

    From there, the charitable fund sells your appreciated holdings and you instruct the charitable fund custodian to make your desired donations.  The account custodian sends a check to your charity(s) of choice.

    The importance of this method is two-fold:

    • First, it simplifies the process because you only have to donate shares to one fund instead of multiple charities.
    • The second key component is it allows you to donate amounts larger than you are planning to donate in a given year, qualify for the larger itemized deduction, and then make donations on your timetable. This is very important with the current tax law because of the larger $24,400 standard deduction most Americans filing jointly now qualify for ($27,000 for those age 65 and older), thus potentially eliminating the added tax benefits of making charitable donations because you already qualify for the higher deduction without the charitable donation.

I began donating shares instead of cash a few years back and it has worked out great.

If you would like to explore this in greater detail in your own unique situation, let us know as soon as possible so we have time to evaluate all options and implement the best strategy for your unique tax situation.

Stay tuned to for the next edition where I discuss a second strategy for those age 70 ½ or older.  This one is VERY important!

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)